An accountant entering the tax business after passing the CPA exam is certain to encounter work beyond just preparation of tax returns. People also need help with uncommon tax situations. One such case arises when a joint tax return causes trouble for both spouses even though one of them is not responsible for the problem.
The possibility for relief for spouses - or ex-spouses - who encounter tax collection efforts regarding prior acts outside their knowledge is known as the Innocent Spouse Claim. This IRS process is addressed in a CPA exam study guide. It applies to individuals whose spouses are guilty of false tax reporting.
Applicants for an Innocent Spouse Claim agree to cooperate with the IRS and submit to a qualification process. This helps the IRS determine their involvement in the fraudulent tax returns. Spouses who are found innocent of tax cheating are exonerated from the liability imposed on the guilty spouses.
When applying the details from CPA examination books for an Innocent Spouse Claim, accountants must carefully assess the circumstances. An innocent spouse claim is invalid if both spouses cheated together. A recent case of joint tax evasion illustrates the point.
Thomas K. Frye and Kathy M. Frye were indicted for conspiring to defraud the United States, tax evasion, and filing a false claim for tax refund. In addition, Mr. Frye was charged with passing fictitious financial instruments.
The couple's tax manipulation allegedly began in 1999 with the submission of forms to employers that falsely claimed they were exempt from federal income tax. The Fryes are accused of filing a false income tax return for that year that understated their income.
Apparently, the couple did not hire a tax professional. Any accountant knows from CPA exam classes that the IRS catches understated income by comparing tax returns to reporting documents of paying parties, such as employers.
But the Fryes did not stop there. They also allegedly filed a false refund claim with the IRS for $317,990 in 2008. A refund of that size would have raised the attention of any tax professional with certified public accountant training before even reaching the IRS.
With both spouses seemingly involved in the tax avoidance measures together, an Innocent Spouse Claim is out of the question. Adding to the absurdity, Mr. Frye submitted false financial instruments to the IRS as purported payment for the join tax liability with his wife. In one of the instruments, Mr. Frye represented to the IRS that it had a value of $100 billion.
If convicted, Mr. Fry faces a potential prison term of 105 years and Mrs. Fry could serve up to 30 years. Presumably, the Fryes are represented by legal counsel. But, an easier course would have entailed hiring a tax accountant years ago.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.