Roberts Posted October 19, 2021 Report Posted October 19, 2021 This is a first for us. He was indicted, arrested and I'm confident he will be going to federal prison (he tried to explain to me that it will "only" be 5-10 years). He paid illegal kickbacks which he took as a business deduction so once the courts declare those payments illegal, will the IRS automatically audit him? He'll owe about $8m (I'm guessing) and has assets of about $4m which is mostly in retirement accounts which will trigger another tax bill he can't pay. Even if they lowered his amount owed to $3m, he'll owe $750k+ in taxes on any audit. Other question! I've never done an innocent spouse case, would that apply to his retirement plan early withdrawals to pay his fines that are now taxable? 75% of his assets are in retirement accounts so when he is forced to withdraw it to pay his restitution, that's now taxable. Does innocent spouse get her a way to avoid it? I'm thinking that wouldn't apply and she'd be on the hook. (I think innocent spouse would avoid the audit trigger mentioned above but maybe not the retirement plan distributions?) He's barely a client so I didn't do his taxes. 1 Quote
Lee B Posted October 19, 2021 Report Posted October 19, 2021 So are you working with the spouse? I don't think I would perform any work in this case unless I was retained by the client's attorney. 4 Quote
ILLMAS Posted October 19, 2021 Report Posted October 19, 2021 This the time you tell the client to lawyer up, I would not touch it. 4 Quote
Roberts Posted October 19, 2021 Author Report Posted October 19, 2021 Oh he has an attorney and I haven't been hired. I'm just wondering. 2 Quote
Gail in Virginia Posted October 19, 2021 Report Posted October 19, 2021 I would not touch this one with a ten foot pole, and that includes the spouse. However, the penalty for the withdrawal from retirement accounts will occur in the year in which the withdrawal occurs. So if I were his spouse, I would not file a joint tax return with him in that year, or ever again for that matter. 5 Quote
Lion EA Posted October 19, 2021 Report Posted October 19, 2021 And, you have a conflict of interest if you advise the spouse but know of taxpayer's biz mis-dealings from your professional work for the couple, for his biz, whatever. Tell him to use his lawyer. If you agree, lawyer can hire you. Recommend a good preparer to spouse. You could work for spouse, if you are careful. I would run, not walk, away from this! 4 Quote
Roberts Posted October 19, 2021 Author Report Posted October 19, 2021 I'm not really sure how many times I need to say he's not a tax client. 1 Quote
jklcpa Posted October 19, 2021 Report Posted October 19, 2021 1 hour ago, Roberts said: Other question! I've never done an innocent spouse case, would that apply to his retirement plan early withdrawals to pay his fines that are now taxable? 75% of his assets are in retirement accounts so when he is forced to withdraw it to pay his restitution, that's now taxable. Does innocent spouse get her a way to avoid it? I'm thinking that wouldn't apply and she'd be on the hook. (I think innocent spouse would avoid the audit trigger mentioned above but maybe not the retirement plan distributions?) Were the illegal deductions on a Sch C or pass-through entity that she was part owner in and had knowledge of the payment and deduction? Innocent spouse rules pertain to those prior acts and returns. That rule wouldn't apply to future returns where the husband is withdrawing funds from his retirement for restitution, but if she files a joint return for the years going forward that have the retirement withdrawals, she would be liable for the tax liability and any early w/d penalties on those future years' returns, if any. To avoid that problem, she should file as MFS from now on, not jointly. I don't know if the court notifies the IRS. IIRC, there is a limited time period in which to apply for innocent spouse after IRS initiates collection. 2 Quote
Roberts Posted October 19, 2021 Author Report Posted October 19, 2021 MFS makes good sense. I know he set his business up as an S-corp and she wasn't an owner. Innocent Spouse time limits are essentially limited to collection timelines. They voided the 2 year rule several years ago. I'll probably skip telling him about MFS - not my business. Whoever turned him in has likely already done a whistle blower with the IRS. 1 Quote
Lion EA Posted October 19, 2021 Report Posted October 19, 2021 4 hours ago, Roberts said: Client is going to prison This is a first for us. He was indicted, arrested and I'm confident he will be going to federal prison (he tried to explain to me that it will "only" be 5-10 years). He's barely a client so I didn't do his taxes. So, is he a bookkeeping client? S-corp tax client? Personal tax client? What kind of client is he? You might want legal advice from your E&O insurer. Or, even your own lawyer, depending on what your involvement was with this barely a client. 4 Quote
Sara EA Posted October 20, 2021 Report Posted October 20, 2021 Spouse might not be so innocent; the IRS will determine how much she knew when it reviews her innocent spouse claim. I wouldn't touch it. His criminal attorney surely has contacts with a good tax attorney for the spouse. Just decline the engagement because this situations calls for an attorney. 4 Quote
BulldogTom Posted October 20, 2021 Report Posted October 20, 2021 Any chance the spouse can divorce and get a chunk of the the retirement in a QDRO? If spouse is truly innocent, a determination that is still up in the air based on what you have posted so far, then a quick divorce with a property settlement that gives spouse half of the retirement assets might keep it out of the hands of the IRS. Tom Longview, TX 2 Quote
Sara EA Posted October 21, 2021 Report Posted October 21, 2021 Sinister! All that money this crook owes might buy the IRS a new computer or two or a few printers or maybe some phones and people to answer them. 2 Quote
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