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I have created a sort of perfect storm situation for myself

and want to be sure...
I have created a sort of perfect storm situation for myself and want to be sure I have not done anything that could get me in trouble later.

I got divorced in spring of this year and got remarried this summer.

My ex-wife got virtually our entire net worth (roughly 4 million) plus I have to pay $7000 per month alimony for the next 9 years. I was left with my 401K of $240,000.

Last year, I liquidated the $240,000 and paid the 10% penalty. I then proceeded to give all the money to my girlfriend at that point (now my wife.)

My new wife is not a U.S. citizen and does not plan to be.

Once I gave my girlfriend the money, she purchased a house in her name here in a foreign country where we are living.

Last year, I also stopped my internet based affiliate marketing business. I reopened the business in my girlfriend's name (a foreign national). Now, all the sales originate in the U.S. But since she is a foreign national, she is not required to pay U.S. tax. And the tax laws here are such that she is not required to pay income tax on the money in this country because the sales originate in the U.S. The yearly income is about $350,000.

This year, at a point when I had no assets left (because all of the income beginning this year is in my new wife's name, the house is in her name, the car is in her name) I took out about $150,000 in cash advances on my U.S. credit cards. Soon after taking out the money, I informed the credit card companies that I had moved to London. I only stayed in London for one month, and then moved to the other country where I am now and will be getting residency shortly.

Based on what I have done, my income is currently 0 and my assets are currently 0. But I have $150,000 in debt. Now when I file my taxes this year, I will show 0 income and that I have paid $84,000 in alimony to my ex-wife.

I have not made any payments on the credit cards and don't intend to. I have gotten notification from a couple that they are getting ready to charge-off the debt. But if they send me a 1099-C, I will likely never get it.

So my only current concern is a potential IRS audit over the $150,000 that MAY appear on 1099-Cs that I won't receive. But as I understand the law, I would not be required to pay income tax on the 1099C because I am insolvent. I don't know if I should just contact the credit card companies periodically to see if they have sent me a 1099-C.

I am figuring that if I just keep filing my taxes with 0 income and $84,000 in alimony paid, I will be okay if ever audited over the 1099-C on the basis of the insolvency.

Is there anything else I need to worry about in the scenario I have detailed?
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Answered in 13 minutes by:
10/22/2013
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,875
Experience: 15years with H & R Block. Divisional leader, Instructor
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Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
The one thing that jumped out as your explained your situation, how can you pay $84,000 in Alimony if you have no income or assets?

Robin D. :

The IRS could ask that question very easily.

Customer:

Well, for the next 2 years, that was the money that came from the cash advance on the credit cards.

Robin D. :

Where are you keeping that money? Again a n IRS question?

Customer:

Well, that money was deposited in my wife's foreign account. But again, she is a foreign national. I do not have signatory privileges on that account.

Customer:

Thanks for your assistance. I want to know if I am violating any laws by what I am doing.

Robin D. :

Violating laws. "I reopened the business in my girlfriend's name". Attempting to hide income is against the law. If you disposed of your business or even gave it away that is reportable.

Customer:

The business was basically an account. Just an affiliate account. And I suppose if someone was inside my head, they would know what I did.

Customer:

But on paper, the account stopped receiving income.

Robin D. :

So you did not file as a business for tax purposes?

Customer:

It would seem that my wife's business, whatever it might be, would not be the IRS's business because she is not a U.S. citizen. Is that correct?

Customer:

The income was filed under a schedule C. There were no assets to the business. Just income and advertising expense.

Robin D. :

If her business is doing business in the US then it is their business. Based on the structure of the business the filing for the business income would be relevant.

Customer:

This year, no income, no advertising expense.

Robin D. :

So the Schedule C income just ceased.

Customer:

When she opened her business, she filled out I think a W-8, but only with the company that actually sends her the money.

Robin D. :

What is the business structure, sole prop as well?

Robin D. :

Liek you had?

Robin D. :

Like* sorry

Customer:

She established a foreign corporation.

Robin D. :

So she does marketing for a US company but has a foreign corp

Robin D. :

She does nothing in the US itself?

Customer:

No, she has never set foot in the U.S.

Customer:

She just receives commission, paid to the foreign corporation. The internet makes all this kind of cool stuff possible.

Customer:

I guess the big question is, if I am married to a foreign national, and she gives me money to pay my alimony from her business, what are the tax consequences for me?

Robin D. :

Then her foreign corp would not be "doing business in the US" if the service provided is not in the US. This would mean she would have no tax responsibility to the US

Robin D. :

If she gives you money that is a gift

Customer:

If a spouse gives a husband money that is a gift? And I should be paying gift tax?

Robin D. :

I must check on the gifts from nonresident alien spouse

Robin D. :

You may have to report but I have to check on that. Normally gifts from foreign individuals are reportable (not taxable)

Robin D. :

One sec...............................

Robin D. :

If she gives you $100,000 or more in one year you must report the gift (form 3520). You would not be taxed unless the IRS questioned the validity of the gift vs compensation. As this would be from your spouse they most likely woudl not question.

Customer:

Cool, okay, so since the alimony is never more than $84,000, I skirted this one.

Customer:

So, then, it appears that receiving the alimony from my spouse explains where I got the money from.

Customer:

But if filing a return with 0 income and $84,000 alimony sets off red flags, perhaps it is better not to file. Since my income is 0, I am not required to file at all going forward, right?

Robin D. :

If you have no income then you are not required to file a tax return.

Customer:

But getting back to my real initial question, regarding the $150,000 in cash advances and a potential 1099-C that I may not receive. First, what is the likelihood of me being audited in a situation with no return filed and then the 1099-C comes in showing $150,000. I am figuring that if I were audited, I could simply show that I had never received the 1099-C, didn't know the write-off had occurred, but show that I was insolvent at the time of the write off and so that no taxes would be owed.

Robin D. :

It would not be an audit it would be a notice requesting to know why you did not file. Then another then an assessment fo your return which would mean the IRS would prepare a return for you and request the tax.

Robin D. :

An audit happens to a filed return.

Customer:

And if that happened, would I simply need to file I think it is a 982?? that would show me being insolvent?

Robin D. :

That is correct

Robin D. :

Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent.

Customer:

And since I had no income, I was not required to file taxes, so I'm basically in the clear and just have to answer if the IRS sends me a request for tax?

Robin D. :

If you had no income or income that is below the requirement to file a tax return then you are not required to file.

Customer:

Now based on everything I have said, it seems my only liability relates to what I did with closing my business and then having my wife re-open hers.

Robin D. :

Yes

Customer:

Clearly, this is the kind of thing that doesn't show up anywhere, not like the two businesses had the same name or anything, and because it was a Schedule C for me, no requirement to file in this year when I have made no income.

Customer:

Is the idea that I should have sold it to my wife for some kind of fair market value and then reported that as income?

Robin D. :

Not necessarily. The real idea would be that if you are not in this new endeavor then her business is her business. Did you give her assets or property from the business?

Customer:

Actually, there were never any assets of property.

Customer:

No assets or property.

Customer:

It's all about the idea of the advertising.

Robin D. :

No computer for online work?

Customer:

She brought her own computer into the marriage.

Customer:

Like I said, internet businesses open up a whole different world.

Customer:

I guess the real issue is, because by doing what I did I am able to skirt U.S. taxes, is it de facto illegal?

Robin D. :

If you are trying to receive income and not pay tax on it by assigning income to someone else, that is illegal.

Robin D. :

It would be up to the US treasury department to investigate and decide

Customer:

But if I gave my spouse the idea, and she is the one doing the work of executing the idea on a daily basis, then the income if rightfully hers, or not?

Robin D. :

I already said if it is her business it is her business but if you are doing the work ................

Customer:

That's the point, she is doing the work.

Customer:

Using my million dollar idea.

Customer:

The "work" involves setting up a few ads and monitoring them for a few minutes a day,

Robin D. :

Then you would not have to even ask the questions. You already know that you are taxed on your worldwide income

Robin D. :

She is not if she is not a US person nor doing business in teh US

Customer:

Well, I guess the question is, if I am married, under U.S. law, is her income also mine?

Customer:

Even if she is not a citizen?

Robin D. :

Only half could potentially be if you were in a community property state

Robin D. :

Are you in a country that sees income as community property?

Robin D. :

Does the US have a tax treaty with your new home?

Customer:

But I am living permanently outside the U.S., and no, it does not see income as community property here.

Robin D. :

Then no, not even half her income is yours.

Robin D. :

for US tax purposes

Customer:

But if I understand you correctly, it sounds as though there is an element of subjectivity to the law. In other words, if the IRS were to look at my situation and decide that I had done everything I had done for the purpose of evading taxes, that would be enough for them to say I owe them the money, right?

Customer:

Meaning, it really comes down to what was in my head, more than anything, or more importantly, what the IRS says was in my head.

Robin D. :

That would be enough for them to turn it over to the criminal investigators.

Customer:

Well, thanks for your help. My main concern was about the 1099-C issue.

Customer:

But it sounds like it is a better idea not to file returns just to show the alimony payments, right? That doing so would look funny and since I don't have to file, better not to?

Robin D. :

The 1099C if issued would need to be reported especially if you wish to claim insolvent.

Robin D. :

If you have no or very little income you are not required to file a tax return

Customer:

I am saying that because paying the alimony without income looked funny to you right off the bat, it might also look funny to the IRS. And my best strategy with everything I am doing is to stay under the radar as much as possible.

Robin D. :

I in all good conscience can not use the term "stay under the radar". I can only advise on the tax requirements to file and how your income is reported.

Robin D. :

If you have no income you are not required. If I saw the return that would be my question.

Robin D. :

That much payment with no income would raise thoughts. Maybe they can be explained but they are still there

Robin D. :

You realize of course that your ex has to report the alimony anyway as payment to them?

Robin D. :

They have to report the amount and who gave it to them

Customer:

Okay, so my ex reports the alimony paid. But from an IRS standpoint, I would think they would be more concerned with me deducting the alimony and her not reporting it, not the other way around.

Robin D. :

It was just a point I felt worth noting.

Customer:

I appreciate that, but my general understanding of how audits and things work is that the IRS goes looking for where the money is.

Robin D. :

Yes they do

Customer:

That's what I meant about them being more concerned with me reporting the deduction and then her not showing the income.

Customer:

If nothing tells the IRS I am making any money (no 1099s, no W-2s) no lavish lifestyle, I am not a good candidate to examine, would seem to me.

Customer:

That's why I was worrying about the 1099-C -- the only thing that might cause the IRS to come looking for tax money from me.

Robin D. :

I understand.

Customer:

Thanks very much for your help. I appreciate it.

Robin D. :

You are most welcome.
Your positive rating is always thanks enough.

Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,875
Experience: 15years with H & R Block. Divisional leader, Instructor
Verified
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Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,875
15,875 Satisfied Customers
Experience: 15years with H & R Block. Divisional leader, Instructor

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