Tax Evasiveness

It may help to tell him about other business owners who overcame similar tax-avoidance tendencies, and scary stories about those who didn't. You might also examine how he spends his money and what he spends it on. If he's an impulsive or compulsive overspender, is he willing to acknowledge this problem and seek help for it?

Practically speaking, if he's unwilling to take responsibility for keeping his hands off a savings account, there must be a way to put aside money he can't withdraw by himself. An account that requires both your signatures on every check? Some sort of escrow account?

Whatever you do, help him face the fact that better tax planning can reduce his quarterly financial stress.

When a husband or wife does the family taxes, the spouse often doesn't even look at the completed 1040 before co-signing it. If deliberate tax evasion is involved, it will be hard for well-educated folks to claim they were "innocent spouses." Without casting aspersions on the wife or husband who prepared the taxes, how can I tactfully encourage a head-in-the-sand spouse to review the joint tax return carefully? Tell them about District of Columbia Congresswoman Eleanor Holmes Norton, who didn't notice that her otherwise competent husband failed to prepare D.C. income tax returns for seven years. She signed federal tax returns all that time without noticing the absence of D.C. returns. When a reporter discovered this oversight, the ensuing debacle cost her her marriage (not to mention more than $80,000 in taxes and penalties).

Unintentional mistakes are one thing. But as more and more clients have their own businesses, planners are seeing an increase in under-the-table cash payments and other tactics to reduce taxable income. I heard of one client's ex-husband who had gross income of more than $600,000 a year from an automotive franchise, but claimed expenses that reduced his net income to $14,000. Knowing what a drastic effect this would have on the man's child support payments, the client's advisor sent his tax return to a CPA, who found that many deductions were invalid.

To prevent spouses from being hurt by what they don't know, go over tax returns carefully with both wife and husband. You might also consider holding a seminar to help "avoider spouses" become knowledgeable enough to review their tax returns for errors or omissions. As money- phobic clients get better at this, their self-confidence and sense of empowerment will skyrocket, and they'll thank you for your prodding and your support.

A divorced client recently married a fellow who supplies bait to commercial fishermen. It's a high-volume business in which most transactions are in cash. When she asked him about a stash of $35,000 she found in a desk drawer, he told her it was to pay his suppliers. She's concerned that he may be hiding a lot of income from the IRS, and making it possible for his vendors to evade taxes too. What should she do? She doesn't want to harm her new marriage. I can sympathize with your newlywed client's reticence to confront the taboo issue of money with her husband. But after listening to her fears and empathizing about how difficult her situation is, you need to persuade her to take the bull by the horns. She should gently tell her husband that she is just not comfortable with this method of doing business and is concerned that it may endanger their financial stability.

If he tells her he knows how to handle his own business, you might suggest that she use your authority to back up her position. She could propose that the two of them meet with you to get better aligned on how they handle their money. If he ignores her concerns, it's better for her to find out now, before she commits too much time to this relationship.

When you're confronted with a problem of tax evasiveness, it forces you to walk a tightrope. You need to understand where these folks are coming from, confront their resistance, blindness, or venality when necessary, and let go of the ones whose lack of integrity might imperil your own good reputation. The more courageous you are in being truthful with your clients, the more likely you are to win the respect of those you want to keep.

Olivia Mellan, a speaker, coach, and business consultant, is the author with Sherry Christie of The Advisor's Guide to Money Psychology, available through the Investment Advisor Bookstore at www.investmentadvisor.com. E-mail Olivia at[email protected].