I read an article in the Fall 2017 Family Lawyer Magazine (yes, I’m behind on my reading pile) that talks about away to hide income – at the IRS. Husband owed wife spousal support, which was calculated on his actual net income. After receiving a raise, Husband increased his federal withholding taxes above the amount that should have been withheld. This had the effect of reducing his new pay to his pre-raise level and hiding his annual pay increase. He used this decreased net income evidence to influence the court to order less in spousal support.

This same Husband also sent a lump-sum estimated tax payment to the IRS while the divorce was pending, which resulted in an over-payment. Husband elected in his tax return to use the refund to carryforward to next year’s taxes. Combined with the over-withholding from his income and the secreting lump-sums at the IRS over the course of a couple of years, a pretty sizeable asset accumulated.

There are two reasons why this type of scheme would be difficult in Texas. First, all support payments in Texas are based off of gross income. While child support percentages apply against net income, there is a mandatory calculation for taxes to be considered based on a single person claiming one exemption so no “funny business” can be done to manipulate the taxes withheld.

Second, in a divorce, previous years’ tax returns are discoverable, and most lawyers are astute enough to look at any tax carryforwards.

Even so, somone who wants to try this type of scheme should also be warned that the IRS would deem such a scheme to be a frivolous filing and could asses a penalty. (See IRC 6702(a)(22). The penalty for filing a frivolous tax return si $5,000.

If you or your lawyer aren’t familiar with how to read tax returns and find these types of schemes, consult with a forensic accountant for help.

 

Hat tip to Harriet Fox, CPA and her article Hiding Income and Assets at the IRS.