tax question, should i notify the IRS and claim innocent spouse rule, please read and help?

Question

my wife owns a hair salon that is incorporated for 6 years, she has written her car off every year even though the corp does not own the car its only in her name, she claims no tips and only writes herself a check for 1000 dollars a month, for personal income, even though she pays half the mortgage, 850, she has 2 car payments one car she bought for her dad and is 300 a month and her car is 500 a month, she makes her credit card payments about 800 a month, it just does not add up is this all legal

Answer 1

Was there an audit? Is there a tax liability from an audit?

If you are uncomfortable with the return, do not file jointly. She can not force you to. If you filed jointly in the past and an audit of a return resulted in a balance due, you can be held liable for the results.

Innocent Spouse is a little difficult to prove. You must prove that you did not know about the extra income and in no way benefited financially from it. It does not sound like Innocent Spouse would apply in your case.

Answer 2

Obviously this doesn't add up, and obviously she is doing something illegal. If she hasn't already been audited, she very likely will be one of these days - and when they see what's going on, they'll go back to previous years. And the normal 3 year limit wouldn't apply since fraud is involved. If you have been filing joint returns, you will be held liable for the back taxes, interest and penalties along with her.

See http://www.irs.gov/individuals/article/0,,id=109283,00.html for info on innocent spouse claims. Part of it says:

What are the rules for Innocent Spouse Relief?
To qualify for innocent spouse relief, you must meet all of the following conditions:

You must have filed a joint return which has an understatement of tax;
The understatement of tax must be due to erroneous items of your spouse;
You must establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax;
Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understatement of tax; and
You must request relief within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998

Basically, innocent spouse is something you claim after additional amounts are assessed, to say you shouldn't have to pay any part of them. You might have a pretty hard time convincing someone that you meet these requirements, especially the one about not knowing or having any way of knowing this was going on.

Nobody can tell you what to do. If you turn her in, then yes, she's likely to be audited sooner rather than later. Either way, this is a disaster waiting to happen.

Answer 3

Wayne is absolutely correct.

Without examining the business' books and the tax returns that you or she filed, it's not possible to say if there is any funny business going on.