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This the time you tell the client to lawyer up, I would not touch it.

And, you have a conflict of interest if you advise the spouse but know of taxpayer's biz mis-dealings from your professional work for the couple, for his biz, whatever. Tell him to use his lawyer. If you agree, lawyer can hire you. Recommend a good preparer to spouse. You could work for spouse, if you are careful. I would run, not walk, away from this!

I would not touch this one with a ten foot pole, and that includes the spouse. However, the penalty for the withdrawal from retirement accounts will occur in the year in which the withdrawal occurs. So if I were his spouse, I would not file a joint tax return with him in that year, or ever again for that matter.

So are you working with the spouse? I don't think I would perform any work in this case unless I was retained by the client's attorney.

Were the illegal deductions on a Sch C or pass-through entity that she was part owner in and had knowledge of the payment and deduction? Innocent spouse rules pertain to those prior acts and returns. That rule wouldn't apply to future returns where the husband is withdrawing funds from his retirement for restitution, but if she files a joint return for the years going forward that have the retirement withdrawals, she would be liable for the tax liability and any early w/d penalties on those future years' returns, if any. To avoid that problem, she should file as MFS from now on, not jointly. I don't know if the court notifies the IRS. IIRC, there is a limited time period in which to apply for innocent spouse after IRS initiates collection.

Oh he has an attorney and I haven't been hired. I'm just wondering.

We need an incognito dope slap one to send to clients, something that looks like to us the senders but is just a neutral one on the receiver's email. You know, that dope slap that we pull back into a Hi or thumbs up to our clients!

So, is he a bookkeeping client? S-corp tax client? Personal tax client? What kind of client is he? You might want legal advice from your E&O insurer. Or, even your own lawyer, depending on what your involvement was with this barely a client.

MFS makes good sense. I know he set his business up as an S-corp and she wasn't an owner. Innocent Spouse time limits are essentially limited to collection timelines. They voided the 2 year rule several years ago. I'll probably skip telling him about MFS - not my business. Whoever turned him in has likely already done a whistle blower with the IRS.

I'm not really sure how many times I need to say he's not a tax client.

@Catherine Better late than never? Choose "Custom" from the Categories dropdown!

Follow Pacun's explanation to get a grasp on crypto. IRS regs consider crypto to be property, subject to the usual cap gain/loss rules with the exception that wash sale rules don't apply; no FBAR reporting is required either at this time. (Not sure about a Venezuela registered account though.) The FMV of the "rewards" is reported as other income, because the client got something of value for nothing (just like getting interest). I'd say the Venezuela freebie is also other income (just like banks used to offer you $20 to open an account), again because you got something for nothing. Crypto purchases are not tax reportable (just like buying stock isn't; IRS even says not to mark the box on the return if the client only bought crypto). Sales, however, are capital transactions. Conversion is selling one type of coin to buy another (just like selling GM stock to buy Ford stock), so it goes on Sch D. Using a coin to pay for something is also a sale, but hardly anyone ever does that. Moving coins from one wallet or exchange to another is not reportable, just like changing banks doesn't have any tax implications. Just think of the coins as stock. If you buy it, nothing to report. If you sell, it goes on Sch D. Tell crypto clients to get the tracking software. My clients who have it produce a filled in Sch D complete with 8949s, which I attach to the return. Coinbase statements often don't give dates and even if they did, the prices of various cryptos change by the second so there is no way to look up FMV like you could for a stock. The software may also account for things like "hard forks" and "airdrops" that I won't confuse you with because I'm confused! The basic rubric, though, is treat it like a stock transaction--that should make it simpler in your mind and eliminate most of the noise.

@Eric - whatever happened to our wonderful little emoji of banging a head against a brick wall? That would be the *perfect* response to this post!

This is a first for us. He was indicted, arrested and I'm confident he will be going to federal prison (he tried to explain to me that it will "only" be 5-10 years). He paid illegal kickbacks which he took as a business deduction so once the courts declare those payments illegal, will the IRS automatically audit him? He'll owe about $8m (I'm guessing) and has assets of about $4m which is mostly in retirement accounts which will trigger another tax bill he can't pay. Even if they lowered his amount owed to $3m, he'll owe $750k+ in taxes on any audit. Other question! I've never done an innocent spouse case, would that apply to his retirement plan early withdrawals to pay his fines that are now taxable? 75% of his assets are in retirement accounts so when he is forced to withdraw it to pay his restitution, that's now taxable. Does innocent spouse get her a way to avoid it? I'm thinking that wouldn't apply and she'd be on the hook. (I think innocent spouse would avoid the audit trigger mentioned above but maybe not the retirement plan distributions?) He's barely a client so I didn't do his taxes.