When one or both spouses have an ownership interest in a business, it is critical to get both income tax returns and financial statements for the entity. It is impossible to fairly evaluate the business and the income from it without both of these.
Many times we meet resistance from the spouse during discovery. It is common to hear “we already gave you the financial statements, why do you need the tax returns too,” or vice versa. Both are important because they provide different information. Occasionally the two will have identical information, but the vast majority of the time there will be different numbers and different levels of detail. We want as much information as possible on the business, so both are critical.
But when it comes to tax returns, there are common objections to producing them:
- I don’t have them.
- I need approval from the board or other shareholders to release them to you.
- They have private information on them that I’m not allowed to disclose.
All of these arguments are nonsense. In fact, the Internal Revenue Code specifically allows access to income tax returns to any owner of a business with a 1% or greater interest:
5. Any bona fide shareholder of record owning one percent or more of the outstanding stock of the corporation, upon submitting documentation which reasonably demonstrates such ownership. Such shareholders may have access to returns and return information for all years. However, they have no access rights when they are no longer shareholders. See IRM 22.214.171.124.1 for additional information and guidelines about requests from one percent shareholders.
One Percent Shareholders
1. Pursuant to IRC §6103(e)(1)(D)(iii), any bona fide shareholder of record owning one percent or more of the outstanding stock of a corporation may make a written request to access the returns and return information of that corporation. The requester must be:
a. A shareholder of record on the books of the corporation whose information is being requested
b. A bona fide shareholder, and
c. A beneficial owner of one percent or more of the corporation’s outstanding stock
What if the spouse will not produce the income tax returns in spite of this?
Have the court order him or her to acquire them and produce them. Do not allow the spouse to get out of this requirement by claiming he or she does not have the income tax returns. The shareholder has a right to the returns, and therefore can get them, and can turn them over. There is no “permission” needed from any owners, board members, or executives. A court order is more than enough to make this happen.