Financial infidelity happens all the time, but tax pros say there are a few ways to protect yourself at tax time if you think your spouse is hiding something.
1. Actually look at the tax return
Do it before you sign it, says Paul Herman, a certified public accountant in White Plains, New York. “Both spouses should understand what’s on the return, and the reality is that often that’s not the case,” he says. “The second spouse probably is just signing the return and assuming everything is fine.”
If you think your spouse might be up to something, pay particular attention to Schedule B of the 1040. “That schedule will list all accounts, brokerage accounts and bank accounts that are generating income,” he says. “They should also look at Schedule D, which is a schedule of capital gains and losses. Any securities or property that was sold during the year would be listed there.”
2. Meet with a tax preparer yourself
Get copies of your joint tax return and sit down with a tax preparer who can explain what’s in it, says Nancy Hetrick, a senior financial advisor and certified divorce financial analyst at advisory firm Better Money Decisions in Phoenix. If your spouse is bringing home a lot of cash, new cars or other purchases, but your tax return shows only modest income, that may be a red flag. Also see if the mortgage interest deduction on your tax return indicates there’s more than one house (that you might not know about), and look at other income, she says.
“If they’re business owners, we always look at cost of goods sold because the girlfriend is always in the cost of goods sold. That’s where we find the Victoria’s Secret receipts,” Hetrick says.
3. Do some sleuthing
It’s not that hard to get financial records that can help substantiate what your spouse puts on the tax return, Hetrick says.
- Get tax transcripts. These records, which you request from the IRS, show what was on your past returns, whether a tax return was in fact filed and other information. “If there’s any trust issues at all, we always get a transcript because then we know that what’s on the paper is actually what got turned in to the IRS, and they’re often not the same,” Hetrick says.
- Go to the financial institution. “It’s very easy to just walk down to the bank and go to the counter and say, ‘I would like 12 months’ worth of bank statements.’ They might charge you, but they’ll get your Social Security number, they’ll find your account and they’ll give you the bank statements,” Hetrick says.
- Hire help. “For about $450, [a private investigator] can do a national search for bank accounts from someone’s Social Security number. Now, because of the privacy laws they can’t give you the account information. They can only state, ‘Yes, this person has an account at this bank,’” Hetrick explains. International searches for offshore accounts are possible, too, she says. Also, divorce lawyers often find hidden bank accounts by issuing subpoenas to banks.
4. File separately
You don’t have to file jointly just because you’re married; the IRS allows married couples to file separately. You may lose some big deductions and end up paying more tax if you file separately, but if you’re worried that your spouse is up to no good with the IRS, it might be worthwhile, says Jim Parks, a CPA and executive director at accounting firm CBIZ MHM in Los Angeles.
If you’ve filed joint returns in the past, you’d be on the hook for issues from past years, but for the year that you don’t file jointly, you might be off the hook for your spouse’s problems, Parks says.
5. See if you can get relief
If the IRS comes after you for extra taxes, interest or penalties, and you can demonstrate that you didn’t know your spouse was doctoring your joint tax return, you may be able to get relief from the IRS. There are three types:
- Innocent spouse relief, which may get you off the hook if your spouse or ex hid income, reported it improperly or took fake deductions or credits.
- Separation of liability relief, which allocates a surprise tax assessment between you and your spouse or ex. You’re responsible only for the part allocated to you.
- Equitable relief, which might be an option if you don’t qualify for the other two forms of relief.
If you’ve got a sketchy spouse on your hands, it might be smart to avoid filing a joint return in the first place, because this tactic can get complicated, Parks notes. “In general, it’s better to be divorced than married if you’re seeking innocent spouse relief,” he adds.