When staring down a tax problem, most people focus on the numbers. Sometimes however, the real danger isn’t financial, it’s personal. Especially if you have a life partner or spouse. Let me share a story that shows how silence between spouses can turn a tax issue into a full-blown crisis.
A prospective client called me, and he was clearly rattled. He and his wife had done an individual retirement account (IRA) conversion – I am not sure of the particular details (for reasons that will become clear shortly) but it sounded that there was a mistake on their joint tax return – to the tune of over $200,000 in additional taxes. Terrible news but what he told me next was much worse.
He hadn’t told his wife about it.
His wife, who knew nothing about the problem, had converted her IRA over and had funds set aside to pay any taxes. My understanding is that due to some errors on their part, they thought they paid the right amount of tax and so the extra funds were invested into something else. Only later did the prospect realize there was a mistake on the return and that in fact they would owe the extra $200,000.
I asked him – can you pay this in full now? He said no and it would take some time to get the money. Okay. So, have you talked to your wife about this? No. She has no idea. I winced a bit, his wife is going to have to be a part of any agreement with the IRS. I could tell from his voice that he had known about this problem for some time and that he was going to have to eventually tell his wife who was probably going to blow a gasket.
It was eating him up inside.
Tax problems are stressful enough. But when one spouse hides or delays revealing a tax problem to the other spouse, it’s no longer just about the IRS – it’s about trust. Once trust breaks down between spouses, you are going to be dealing with more than just penalties and interest at that point. Look, there is no good time for a tax problem to occur, especially one so large. Still, bad news does not age like a fine wine – the sooner it comes out the better.
At this point, I said, “Look, you need to speak with your wife and let her know what is going on. Once you do, we can all talk together and come up with a plan to get this tax problem resolved.” There is no point moving forward until his wife knows and is on board.
A boat rowing in two directions goes nowhere.
I had a prior case where one spouse had not filed for three years due to caring for his seriously ill spouse and their two children. When he finally wanted to resolve the issue the tax bill had ballooned to almost $400,000. His wife wrote a very detailed email about how she felt about it. In that case, I was able to smooth things over and get both of them on board with my proposed resolution. As a result, I got a payment plan set up, and was able to obtain about $60,000 in abatement. Overall, it was a great result for the couple, but that was because they were working as a team.
In summary, if you’re married and facing a tax issue – especially one that affects your spouse – talk to them. Be honest. Lay out what happened, what you’re doing to fix it, and tell them you want to get it resolved together. So before things spiral, have the hard conversation. It might be uncomfortable, but it’s better than letting silence turn a solvable issue into a personal and financial disaster.
