Marriage and Business Don't Mix

Why Spouses Make Lousy Business Partners
By Stephen J. Dunn, Forbes.comToday

Last month I wrote a column for Forbes about the tax reasons that spouses make lousy business partners. First, business-related tax problems could threaten both spouses' assets and credit if they're partners. Second, if the marriage sours, one spouse might call in the Internal Revenue Service to investigate the other.

Now, from my own practice comes a case that makes my point. Ron, a longtime client, has given me permission to tell his story, provided he's not identified, as a warning to others. Ron called a few months ago. He said that he had found some correspondence indicating that his wife was having an affair. In the correspondence Ron's wife said that she was going to leave Ron in June of this year. In June they would have been married five years, and she would have, at that point, been entitled to a share of Ron's property under their prenuptial agreement. (She is Ron's second wife.)

At about the same time Ron began noting that key financial documentation of his business was missing. A flash drive containing sales and cash receipts data was missing. Ron's wife worked as the bookkeeper of his business. I asked Ron whether he had been reporting all of his business income on his tax returns. Ron said that he had not reported some income that he had been paid in cash.

I told Ron that it was a scenario I had seen all too many times in the past. She was going to divorce him and use his tax exposure to leverage a better financial settlement for herself in the divorce, and possibly report Ron to the IRS Criminal Investigation Division.

I advised Ron to see a divorce attorney. Ron was reluctant. He wondered if the facts really meant what they so clearly did mean (to all the world except Ron). He talked about reconciling with his wife.

I also advised Ron to do a voluntary disclosure with the IRS. This was an agonizing decision for Ron, as it would cost him dearly in additional tax and interest, and possibly penalties, as well as legal and accounting fees. But it would prevent Ron from being prosecuted for having failed to report some of his income.

Ron followed my advice. His divorce is nearly final. The IRS notified Ron two weeks ago that his voluntary disclosure had been accepted, meaning he isn't at risk of being prosecuted.

Last week a divorce attorney representing Ron's wife called Ron's divorce attorney and, not surprisingly, mentioned the income that had been omitted from Ron's tax returns.

Yesterday Ron received a text message from his soon-to-be ex-wife. In the message she acknowledged that she would not receive any of Ron's property because he "had all of his ducks lined up." She specifically mentioned Ron's voluntary disclosure to the IRS. Neither Ron, his divorce attorney nor I had mentioned the voluntary disclosure to Ron's wife or to her attorney. How do you suppose she learned of it? Is it possible she herself had gone to the IRS in search of an informant's reward? (For more on IRS and informants, click here.)

Stephen J. Dunn is a tax attorney in Birmingham, Mich., adjunct lecturer in the University of Michigan-Dearborn College of Business and author. Write to him at steve@demolaw.com.