Wall Street Journal Tax Report, So Your Wife Embezzled $500,000 and the IRS Wants to Tax You: How One Man Used the ‘Innocent Spouse’ Rule to Win Some Relief in Tax Court:
Rick Jacobsen’s wife embezzled nearly $500,000.
After her conviction, the Internal Revenue Service asked him to pay more than $100,000 of taxes due on her theft. Yes, embezzled funds are taxable, and Mr. Jacobsen and his wife had filed joint tax returns.
But Mr. Jacobsen fought back, arguing his own case before a Tax Court judge. He said he didn’t know about the embezzlement and shouldn’t be forced to pay because he was an “innocent spouse.” In an opinion released last month, he won relief from about $150,000 of tax, interest and penalties [Jacobsen v. Commissioner, T.C. Memo. 2018-115 (July 25, 2018)]. ...
Mr. Jacobsen’s odyssey through the tax system shows the perils of signing a joint return with a tax cheat. It also shows that innocent spouses can sometimes escape dire tax consequences with a lot of time and effort, even if they can’t afford a lawyer. ...
The joint-liability provision has been in the tax code since 1938, despite the opposition of many experts, says Carlton Smith, an attorney affiliated with the federal tax clinic at Harvard Law School. In recent years about 50 million couples have filed joint income-tax returns annually, more than one-third of the total submitted.