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Pleasehelpme9
Level 1

Business Filing Type Change

Pretty sure my now ex husband was sneaky with hiding finances the last couple of years of our marriage. Just wondering if there was a benefit for him to change tax filing from a K-1 to W-2. He owned his own business and was the only employee and no partners. I was NEVER privy to his business finances and he started "making less" the last year or so we were together. We always filed jointly and the last couple of years the way he filed changed. Not going to pursue anything, just wanted out, but just wondering for myself. Thanks!

2 Best answer

Accepted Solutions
tagteam
Level 15

Business Filing Type Change

If you are "just wondering", the answer is "Yes, there are a ton of ways to hide or conceal income/assets" and that includes using one or more business structures to do so.

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tagteam
Level 15

Business Filing Type Change

It depends. Is the entity an LLC (partnership) or an S corporation.

 

Owners (officers) of S corporations have to be paid a reasonable salary for services they perform for their S corporations (which would involve issuing a W-2).

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17 Replies
tagteam
Level 15

Business Filing Type Change

If you are "just wondering", the answer is "Yes, there are a ton of ways to hide or conceal income/assets" and that includes using one or more business structures to do so.

Pleasehelpme9
Level 1

Business Filing Type Change

Thanks! I am really wondering if that specific change (from filing with a K-1 to a W-2) would be used for that purpose. 

tagteam
Level 15

Business Filing Type Change

It depends. Is the entity an LLC (partnership) or an S corporation.

 

Owners (officers) of S corporations have to be paid a reasonable salary for services they perform for their S corporations (which would involve issuing a W-2).

Pleasehelpme9
Level 1

Business Filing Type Change

Yep, LLC! So I guess likely the reason for the sudden change in filing type. I was trying to work on the marriage while he was potentially busy hiding assets to screw me. Thanks, confirms my suspicions a little more.

rjs
Level 15
Level 15

Business Filing Type Change

Something doesn't add up here, and you might not have enough information to figure out what's really going on. You said the business was an LLC, and your ex-husband had no partners. But an LLC with only one owner, which is called a single-member LLC, doesn't issue a K-1. The business income and expenses are reported on Schedule C in the owner's tax return. Is there a Schedule C in your joint tax returns (before the change to a W-2)?


There are three different kinds of K-1. Do you know what kind you had?


A Form 1065 Schedule K-1 is for a partnership. That would mean there was at least one other partner. A multi-member LLC is treated as a partnership for tax purposes. It's quite possible, and legal, that he would not get a W-2 from a partnership.


A Form 1120-S Schedule K-1 is for an S corporation. The LLC could have chosen to be treated as an S corp for tax purposes. But as tagteam said, an S corp owner is supposed to be paid a reasonable salary. If he was getting a salary from the S corp he would have gotten a W-2 in addition to the K-1. So either it wasn't an S corp, or he wasn't following the rules.


A Form 1041 Schedule K-1 is for a trust. I don't know much about trusts. If the LLC was held in a trust, it was probably some sort of scheme to reduce or avoid taxes. It could also be a way to hide income or assets from you and the IRS.


Were the K-1s and the W-2s from the same company? It's possible that an LLC that was being treated as an S corp changed to being treated as a C corporation, and your ex became an employee of the C corp. Then he would have gotten a W-2 and no K-1, because a C corp does not issue a K-1. The C corp files its own tax return, but does not show up on the owner's personal tax return. So that could be an attempt to hide income or assets from you and the divorce court. He could have let additional profits, above his W-2 salary, accumulate in the C corp, then taken it out later after the divorce was final.


The IRS is aggressive about going after S corp owners who do not draw a salary. If that's what he was doing, the IRS might yet audit him - and you - for that issue. Even though you were not an owner of the S corp, you are equally responsible for any underreporting of income on your joint tax returns. There is a such a thing as an "innocent spouse," who did not know, and had no reason to know, that the other spouse was cheating or omitting income. But if you filed a tax return with a K-1 from an S corp, or an LLC treated as an S corp, and no W-2, you had reason to know that something was wrong. You would have a hard time convincing the IRS that you were an innocent spouse.

 

Pleasehelpme9
Level 1

Business Filing Type Change

Hmmm I better check the corporation type I said is right. Thought that's what he told me, but could be wrong. In mediation I asked my attorney to hold me harmless since an accountant did all his business tax stuff and I was NEVER privy to business info, income or anything ever!, only tax return I signed once a year and did not understand,  but my attorney and mediator assured me I's be fine based on how it was filed and so language wasn't included in agreement so now you have me a little concerned!! Not that much though because I really don't think he'd do anything illegal. Cheat ME, yes, but IRS? Don't think so. Also, he had a legitimate CPA do the taxes. Where can I find out what kind of business? Is that in tax documents? I may have form name wrong, just know was done without a W2 for years and last couple was a W2 like an employee. Thank you!

tagteam
Level 15

Business Filing Type Change

Do you know the name of his company?

 

If so, you can most likely do a search on the state (the state's web site) where the business is registered, incorporated, or otherwise does business. 

 

Typically, that will be the Secretary of State's web site, Division of Corporations, or the like.

Pleasehelpme9
Level 1

Business Filing Type Change

Pulled up older tax return (pre W2) and is an S-Corporation Nonpassive. What does that mean? And was a K1 reconciliation worksheet. Please tell me that is legit!🙏

tagteam
Level 15

Business Filing Type Change

We have no way of knowing what occurred. You should ask your own attorney or accountant to conduct a full investigation (if you believe that will inure to your benefit).

 

However, if he had an S corporation and was not taking a reasonable salary for his services (but passing all income through on his K-1), then he was "doing it wrong" and, perhaps, his CPA corrected that by advising him to take a salary and issuing a W-2.

Pleasehelpme9
Level 1

Business Filing Type Change

Well I think he was taking a reasonable salary then, he wasn't getting less pay when filing with the K-1. So hopefully all legit as far as IRS goes at least! The less pay happened when we started having more marital problems, which is why I was suspicious he was cheating ME financially since ALL of my pay went into our joint account. That coincides with the change to W2, which is why I thought it could be the reason. I know zero about business and taxes. But he did have less work too, so could be his business really did make less, I have a feeling was more hiding of retirement money anyway, which I didn't even end up asking for half of what was earned during marriage. Just principle of the thing and still bothers me. Hate lies and tryingto screw people! Guess it's all just still raw. Not even a month since divorce. Thanks for the answers,  I appreciate your time. 

rjs
Level 15
Level 15

Business Filing Type Change


@Pleasehelpme9 wrote:

Well I think he was taking a reasonable salary then, he wasn't getting less pay when filing with the K-1. 


"Salary" means income reported on a W-2. If he didn't have a W-2 he wasn't getting any salary at all. He might have been getting a reasonable amount of income, but not a reasonable salary. The distinction is technical and complicated. It has to do with how different types of income are taxed. That's why the IRS cares about the distinction. Taking income from an S corporation (on a K-1) without taking a reasonable salary on a W-2 is cheating. That's not cheating you. It's cheating the government.

 

Pleasehelpme9
Level 1

Business Filing Type Change

Could there be a W2 also? Maybe is in there too? Many pages. I mean was a CPA with a firm even, not a 1 man band, wouldn't he know and make sure it is done right???

rjs
Level 15
Level 15

Business Filing Type Change

Yes, the CPA would have known, and should have made sure it was done correctly. It's actually common for owners of small S corps to not pay themselves a salary. (The fact that it's widespread is why the IRS is up in arms about it.) CPAs have varying degrees of tolerance for it. Some CPAs will advise the client to do it right, but will prepare the return even if there's no salary. Some will badger the client more forcefully. Some will simply refuse to do the return if the client didn't take a reasonable salary. Not all CPAs, and even CPA firms, are totally honest.

 

Pleasehelpme9
Level 1

Business Filing Type Change

Well I know he paid taxes, and I know he's a lot of things (ha!), but I wouldn't think criminal, when it comes down to it. I'm sure the earnings part must be legit (like I said dont see retirement stuff this w2 way, so thought maybe to hide that part from ME). Was hoping would be a solid answer about screwing me and then got a little nervous about IRS! Lol But when I thought about it more, when he got paid, he got an actual paycheck and he talked bad about people who didn't pay their fair share and cheated the government and I just really don't have much concern about that. I just need to let go about the screwing me part because it truly doesn't matter anyway. I wouldn't go after it. I just wanted to know. 

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