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. A spouse may say, “We already gave you the financial statements. Why do you need the tax returns too?” Or the argument goes the other direction: “You have the tax returns. Why do you need the financial statements?” The reason is that these items are not the same thing and do not provide the same information.

Occasionally, the numbers on the tax returns and financial statements will match closely. More often, there will be differences, and those differences can be important. The documents may use different accounting methods, contain different classifications, or provide different levels of detail. One may also point you toward questions that would never occur to you if you only had the other.

When I am trying to understand a business in a divorce case, I want as complete a financial picture as possible. That means getting both.

When it comes to producing business tax returns, however, we hear some predictable objections:

• 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.  The IRS currently explains the rule this way in Internal Revenue Manual 11.3.2.5.1:

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 shareholder has to establish that he or she qualifies. The written request must include information about the corporation, the tax periods requested, the amount of outstanding stock, the number of shares owned, and other information establishing the shareholder’s ownership.

There are additional rules for S corporations. A person who was a shareholder during any portion of the period covered by an S corporation return may have access to the return and return information for that period. The IRS may withhold or redact certain information relating to third parties, so access does not necessarily mean that every page and every piece of information will be released without restriction.

The important point in a divorce case is that “I don’t have the tax returns”  should not end the inquiry. If the spouse has a qualifying ownership interest that gives him or her the right to obtain the business tax returns, the next question is obvious: Why can’t the spouse obtain them?

If necessary, ask the court to order the spouse to acquire and produce the returns. A business owner should not be able to defeat legitimate financial discovery simply by saying that the documents are not currently sitting in his or her files.

The same goes for vague claims that someone else at the company must give permission. Before accepting that explanation, determine what type of entity is involved, what ownership interest the spouse has, and what rights come with that ownership.

Business tax returns can contain information that is enormously useful in a divorce case. They may help verify income, identify assets, reveal transactions with owners or related entities, and raise questions that need additional investigation. Financial statements provide another view of the same business, so we want both so we can compare them and ensure we are fully informed about the financial matters.