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Can the IRS Investigate Your Spouse or Business Partner? Rules and Protections

Can the IRS Investigate Your Spouse or Business Partner? Rules and Protections

If you run a business with your spouse or have a partnership with someone else, you may be wondering – can the IRS investigate your business associates if they suspect wrongdoing? The short answer is yes. The IRS has broad authority to examine not just you, but also those you do business with. However, there are some rules and protections in place.

Let’s break it down in a simple, easy-to-understand way. We’ll look at key factors like whether you file taxes jointly or separately, the structure of your business, and what rights you have if the IRS comes knocking.

Filing Jointly vs Separately

First, it matters a lot whether you and your spouse file taxes jointly or separately. When filing jointly, you are both equally responsible for the accuracy of the return and any tax owed. This means the IRS can hold either spouse liable for any errors or unpaid taxes, even if all the income was earned by one person. So filing jointly opens you up to more risk if your spouse isn’t fully honest or makes mistakes.

On the flip side, filing separately keeps your tax obligations more siloed. The IRS would need to determine which spouse’s activity led to any errors or unpaid taxes before pursuing action. Your individual liability is lower. However, filing separately may not make sense depending on your situation – talk to a tax pro.

Sole Proprietorships vs Partnerships

If you operate a business with your spouse, the legal structure also plays a role. As a sole proprietorship, one spouse is considered the owner and the other may be an employee. This provides some separation for tax purposes. The IRS would need to link any issues to the proprietor spouse.

In a partnership, both spouses have an ownership stake and share profits/losses. So both are responsible for all partnership tax matters. If the IRS investigates the partnership, both partners’ dealings would be fair game. Consider an LLC taxed as a partnership – it offers some liability protection but doesn’t shield from IRS inquiries.

When the IRS Can Investigate Your Spouse

In most cases, the IRS needs your consent to examine your spouse’s tax return. But there are exceptions. The IRS can access your spouse’s tax information without approval if they are investigating your joint return or a business you jointly own.

Christine Twomey
Christine Twomey
2024-03-21
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2024-03-18
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Guerline Menard
2024-03-18
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2024-03-15
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2024-03-15
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2024-02-24
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The IRS can also open an inquiry into your spouse if they have evidence of fraudulent activity or criminal tax evasion. So if the IRS suspects major wrongdoing by you or your spouse, they have broad power to investigate.

IRS Authority in Business Partnership Audits

If you and your business partner receive an IRS audit notice, both partners’ financial activity is open to examination. Audits typically cover the entire partnership’s operations for the year in question.

However, the partnership can “elect out” of the centralized audit rules in certain cases. This means each partner files an amended return and deals with the IRS separately. Not all partnerships qualify, but it’s an option to contain exposure.

Innocent Spouse Relief

Let’s say your spouse hid income or made false claims without your knowledge. And now the IRS expects you to pay the price. You may qualify for “innocent spouse relief” and separation of liability.

To qualify, you must prove you had no knowledge of the tax underreporting or evasion. You also need to establish you did not benefit from it. If approved, you’d be relieved from responsibility for taxes, interest, and penalties caused by your spouse’s deceit.

When the IRS Contacts You

If an IRS agent shows up asking questions about your spouse or business partner, stay calm. Be polite and cooperative, but insist on seeing official credentials. You have the right to have your tax attorney present before answering questions. If the inquiry seems improper, don’t hesitate to contact a lawyer.

The Takeaway

The IRS can, and will, examine your spouse and business partners if they believe it’s warranted. But protections exist, especially for innocent spouses unaware of wrongdoing. Know your rights, and consult a tax pro if the IRS comes knocking unexpectedly.

With the right preparation and representation, you can limit exposure while complying with any legitimate IRS inquiry. We hope this overview gives you confidence to address this sensitive situation.

References:

[1] Married Couples in Business – IRS.gov

[2] Partnerships – IRS.gov

[3] IRS Manual on Disclosure to Persons with a Material Interest

[4] FAQ on Married Couples and Sole Proprietorships – IRS.gov

[5] Elect Out of Centralized Partnership Audit Regime – IRS.gov

[6] Innocent Spouse Relief – IRS.gov

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