Counselor’s Corner
By: Susan Berson

Q: My divorce decree provided that my ex was responsible for paying our taxes. Now, the IRS is sending me letters for payment. I sent a copy of the divorce decree, so why doesn’t the IRS go after him?

A: If you filed a joint tax return for the year that the taxes are owed, then the IRS may still seek to recover payment from you---especially if you have the ability (e.g. assets) to pay and your ex-husband does not. Depending on your circumstances, the IRS may allow you a reprieve if you can prove one of the following three forms of relief: (1) innocent spouse; (2) separation of liability; and (3) equitable relief. “Innocent spouse” relief can be difficult to prove because you must show (a) that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax; (b) that taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax; and (c) that you are requesting the relief within two years after the date on which the IRS first began collection activity against you. Nevertheless, depending on your facts, it may be that you could qualify under separation of liability or equitable relief. Consult Publication 971, Innocent Spouse Relief, available at www.irs.gov, which explains the form that should be filed with the IRS for seeking the relief listed above.

Q: I received a letter from the IRS asking about a deduction I reported in relation to my small business. I prepare my own returns and am concerned that I may be audited if I don’t respond the right way. How can I prepare?

A: When you use the term “audit”, I’m presuming that you are referring to the traditional view of an audit -- a face-to-face meeting with an IRS auditor. (One-third of IRS audits are “letter” audits seeking additional information such as the one you may have received.) How to respond depends on the nature of the deduction being questioned. If the letter solely concerns documenting a tax deduction, send the IRS copies of the appropriate documents. Do not send originals. If it is possible that the IRS letter concerns your entitlement to take a tax deduction or why you took a certain position on your return, consult a tax professional before responding. For example, large deductions for travel, entertainment or car expenses that do not appear to relate to the company’s sales volume can trigger an audit of your return and a tax professional could best help you resolve it. If your return is selected for a traditional face-to-face audit, you can have an accountant, lawyer, or enrolled agent admitted to practice before the IRS represent you at the audit. You can also tape record the meeting if you notify the IRS within 10 days in advance of the audit meeting. For more information, you might order Publication 556, Examination of Returns at www.irs.gov.

Q: My fiancée and I are about to buy a home. He received an IRS notice that he owes a delinquent tax debt. He says that I shouldn’t worry about it and that we should keep our bank accounts separate. If we put the home in my name, he says it will be safe from the IRS. Is this true?

A: If you put the home in your name with knowledge of your soon-to-be husband’s outstanding tax debt, should the IRS investigate further, it may initiate collection against the home under a nominee and/or alter ego theory. Under this theory, the IRS would argue that you and your fiancée have been hiding his assets from collection. The IRS may eventually initiate court action to disregard you as a nominee or alter ego, and go through various steps to collect the debt from the home (or any other assets that the IRS deems to be put in your name for a nominee or alter ego purpose). It would be wise to postpone the purchase of a home, as well as the wedding, until after your fiancŽe resolves his tax problems.

Susan Berson is Prinicipal of the Tax Litigation Group LLC. The answers expressed are those of Ms. Berson and should neither be attributable to the firm, nor a substitute for seeking your own attorney’s advice for any exceptions or additional facts that may be applicable to your situation.

If you have a question for Susan Berson, please send it via email to editor@flourishmagazine.com.