IRS Tax Problems

His Wife Was Arrested for Embezzlement. Then, the IRS Bill Came

by
Lee Reams II
on
8/2/2018
His Wife Was Arrested for Embezzlement. Then, the IRS Bill Came

To say that Rick Jacobsen has been having a difficult couple of years is, at this point, a little bit of an understatement.

According to a piece that originally ran in the Wall Street Journal, Jacobsen's troubles began in 2011, when it was revealed that his wife was hiding a deep, dark secret — not only had she embezzled almost $500,000 from the blood bank where she worked as an accountant, but she was also arrested for it in June of that year. That November, she was convicted and was sentenced to several years in prison. To read more about the particulars of that case, you can find the VA Court of Appeals case opinion here.

Embezzlement and Taxes: What You Need to Know

During this process, Mr. Jacobsen got some additional terrible news. Not only are embezzled funds taxable according to the IRS, but when spouses file a joint income tax return, each is actually 100% responsible for errors or additional taxes on behalf of the other — a provision that has actually been on the books since 1938.

Not too long after his wife was sent away to prison, Jacobsen received a most concerning letter from the IRS in the mail. Not only was it determined that he owed roughly $110,000 in taxes (and penalties, of course) for the calendar year 2010 as a direct result of his wife's activities, but to make matters worse, they also wanted him to pay an additional $18,000 for money that she embezzled in 2011, too.

When you're asked to pay about $128,000 to make amends for criminal activity that you had no knowledge of and were in no way a part of, just because you filed a joint tax return with your spouse like so many other Americans, it's naturally cause for concern. But Mr. Jacobsen wasn't about to take this lying down. He did his research, he came up with a plan and acted on it — and it's something that a lot of people can stand to pay close attention to.

The "Innocent Spouse" Rules

Jacobsen's salvation ultimately came in the form of the "innocent spouse" rules, a provision that was first passed by Congress in 1971 that is used to sever the liability of one spouse if that person wasn't actually complicit in the other's poor tax practices. While the rules themselves don't actually say anything about a case quite like this one, Jacobsen saw it as his only hope.

Based on that, he filed a handwritten request on IRS Form 8857 asking for relief under this set of rules. At first, everything seemed like it was going exactly as it should — the IRS was going to offer Jacobsen the relief he was asking for. However, during his divorce proceedings with his wife, which were still going on at the time, she insisted that he had known about every last dollar she embezzled.

Once the IRS found out about that, his request was denied.

Over the next few years, several legal aid groups rejected his case and he was unable to afford a lawyer on his own. Despite it all, Jacobsen wasn't content with giving up. On his own, he appealed the IRS decision — the Tax Court even went as far as waiving the mandatory $60 filing fee. When the case was finally heard in 2017, the Judge — who only just released her opinion in July of 2018 — said that Mr. Jacobsen is officially off the hook for the money owed from 2010.

The $18,000 from 2011, however, he's responsible for. The Judge argued that by the time that particular return was filed, he knew exactly what was going on. Experts, however, think that Mr. Jacobsen has the grounds for an appeal.

The Tax Implications of Joint Filing

This whole ordeal sheds valuable light on what is actually a very common situation in terms of IRS fraud cases — a situation where one spouse claims to have known absolutely nothing about the actions of another and thus should not be found responsible. It's not something limited to cases as extreme as this one, either. Often the topic comes up when someone is caught using improper deductions and credits, over claiming exemptions, intentionally incorrectly reporting their income, etc.

So long as the taxpayer in question has filed a joint return that has an understatement of tax due to errors created and reported by the other filer, the affected spouse may qualify for this level of relief.

It's important to note, however, that the taxpayer must be able to establish that at the time they signed the joint return, they had no reason to know that such errors were present.

Likewise, in order to actually meet the requirements for innocent spouse relief, the following additional conditions must be true:

  • Taking into account all of the facts and circumstances surrounding the situation, it would be reasonably unfair to hold you responsible for the understatement of tax.
  • You were not involved in the fraudulent scheme in any way, with one example being the transfer of property from one party to the other.

It's also important to note that the fraudulent scheme isn't just limited to the IRS, either. It can also involve a third party like a creditor, an ex-spouse or even a business partner.

Regardless, in an era where tax refund fraud alone hit $21 billion over the last few years, it's clear that this is the type of situation that we are only going to hear more about as time goes on.

Lee Reams II, writes for TaxBuzz, a tax news and advice website. Reach him at [email protected] or on LinkedIn.  

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Lee Reams II

Lee Reams II

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