Divorcing spouses who operate a business together that supports the family may not have their hands in every single aspect of the business. One spouse may rely upon the other to handle the books of the business while the other performs the labor associated with the business trusting that the other is properly handling the financial matters.
Unfortunately, this is not always the case. The spouse handling the day-to-day labor may have no clue that federal or state taxes have not been filed on behalf of the business for years. He or she may not know that the appropriate withholdings for payroll taxes have not been paid for several years resulting in gargantuan taxes, interests and penalties due to nonpayment. Likewise, he or she may not be aware that business accounts were used to pay for personal expenses, creating significant additional personal federal and state income taxes that have not been accounted for.
The result is that by the time the case comes to litigation, what a spouse thought was a thriving and healthy business is a cesspool of business and personal tax debt.
In such a situation, the IRS does not care who incurred the tax debt. It will look to both spouses to satisfy its unpaid tax debt.
Oftentimes, a crucial step is to remove the wrongdoing spouse from access to the company books and accounts. If there are competing allegations by spouses of wrongdoing by the other, the Court may (rightfully) appoint a receiver or sequestrator to handle the business finances.
A receiver or sequestrator is a person appointed by the Court to oversee marital property, including a marital business, to ensure its long-term health and to help ensure its equitable apportionment later. The appointment prevents a spouse from being able to liquidate assets of the business that are subject to the Court’s division at a final hearing.
Typically, a receiver or sequestrator is a certified public accountant or other professional who has business savvy and is familiar with business and tax matters. The court appointed person is given court authorized powers to basically do anything for the business that the spouses could do, including but not limited to, adjust payroll expenses, determine necessary and unnecessary employees, handle accounts receivable, reconcile the books, communicate with the IRS, Department of Revenue, or other tax collecting agencies to ensure that appropriate taxes are being accounted for, sell business property if necessary to galvanize cash flow, and other powers.
The sequestrator’s role is literally to attempt to salvage the health of the business and to satisfy all remaining liabilities to allow it to be carried forward.
In such cases, absolutely no one else will have access to the company books or accounts to ensure the proper operation and function of the business moving forward. The sequestrator or receiver is accountable to the Court and must provide interim reports on the status of the business, accounts, liabilities, and the like.
Further, a good receiver or sequestrator might be able to negotiate downward any federal or state tax debts owed on account of shenanigans by the spouse who handled the books. In doing so, this will reduce the overall liabilities of the business and help to determine whether it can maintain operation or if subject to sale, whether it can be sold at a profit.
The best advice is to always be in the know about your own business. In worst case scenarios, a court appointed receiver, or sequestrator may be a viable solution when faced with a divorce.
