Mark and Leslee Jones were married in 2000. Mark has an MBA from Harvard and worked in the financial markets in New York City. Leslee has a degree in hotel administration and worked for the Hilton Hotel until two years ago, when Mark and Leslee moved to California. They moved because Mark lost his job. He had been accused of embezzlement, and formal charges had been filed against him. However, the charges were dropped because the firm for which Mark worked did not want to be involved in a public scandal. Mark admitted the embezzlement to Leslee and promised that if they stayed married and moved, he would never embezzle again. In California, Mark obtained a job as the chief financial officer of a mid-sized company. His salary, while approximately 60 percent of his former salary was still more than $ 200,000. Mark likes to gamble. He does so by betting on horse races, going to Las Vegas, playing in the stock market, and making speculative real estate investments. The reason he had embezzled the money at his former job was to cover his gambling and stock market losses. While in California, he continued to bet on horse races and visit Las Vegas to gamble. Leslee accompanied him to the race tracks and to Las Vegas. Because Mark was known as a big gambler, their rooms were always provided for free, as were any costs associated with their stays in Las Vegas. Leslee would watch Mark gamble for a while, get bored, and then go to see shows or go shopping. Leslee liked to shop and spent thousands of dollars at a time.
As to the investments, Leslee did not help in the decisions to purchase stock or real estate. However, she did sign all purchase-and-sale agreements for real estate, because California is a community property state. Any proceeds from the sales were paid to both Mark and Leslee. She endorsed all checks, which were deposited in their joint checking account. Leslee and Mark both wrote checks out of this account. What Leslee did not know is that Mark had a separate bank account into which he deposited much of his gambling winnings and stock gains. In the current year, the Jones’s prior two tax returns are audited and material omissions are found. The embezzled money never had been reported, gambling gains were substantially understated, and gains on the sale of stock and real estate were omitted from the returns. Shortly after the Jones received notice from the IRS as to their findings regarding the audits, Leslee filed for divorce, for obvious reasons. What tax-related advice do you have for Mark and Leslee? Will Leslee qualify for innocent-spouse protection from the tax liabilities? She claims that she had no knowledge of any of the underreporting on their tax returns. Mark and Leslee always used a CPA to prepare their returns.