You may be held responsible because you signed the return. IRS offers an "Innocent Spouse Relief Program", however, you must meet all of the following conditions to qualify for "innocent spouse relief":
You filed a joint return, which has an understatement of tax (deficiency), which is solely attributable to your spouse's erroneous item. An “erroneous item” includes income received by your spouse, but which was omitted from the joint return. Deductions, credits, and property bases are also erroneous items if they are incorrectly reported on the joint return
You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax, and
Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax
It appears from your question that you had actual knowledge of omission of income, which will disqualify you. Decisions on innocent spouse relief are made on case-by-case basis. So, there is a possibility that IRS may show some leniency.
IRS Offers Innocent Spouse Relief.
Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows. Both taxpayers are jointly and severally liable for the tax and any additions to tax, interest, or penalties that arise as a result of the joint return even if they later divorce. Joint and several liability means that each taxpayer is legally responsible for the entire liability. Thus, both spouses are generally held responsible for all the tax due even if one spouse earned all the income or claimed improper deductions or credits. This is also true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. In some cases, however, a spouse can get relief from joint and several liability.
There are three types of relief from joint and several liability for spouses who filed joint returns:
Innocent Spouse Relief provides you relief from additional tax you owe if your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits.
Separation of Liability Relief provides for the allocation of additional tax owed between you and your former spouse or your current spouse from whom you are separated because an item was not reported properly on a joint return. The tax allocated to you is the amount for which you are responsible.
Equitable Relief may apply when you do not qualify for innocent spouse relief or separation of liability relief for something not reported properly on a joint return and generally attributable to your spouse. You may also qualify for equitable relief if the correct amount of tax was reported on your joint return but the tax remains unpaid.
Check out: http://www.irs.gov/taxtopics/tc205.htmlAsk a similar question
To answer your questions in reverse order, the penalties are serious. The amount of seriousness depends on the amount in controversy to some extent. And it is impossible to give a yes or no answer if you will be responsible, it depends on a careful analysis of all of the facts, as well as having an experienced tax controversy attorney representing your interests during the investigation from IRS CI leading up to the SAC (Special Agent in Charge Conference) which is basically the last bite at the apple to have no further action taken on alleged tax crimes, because at that point it is referred to DOJ Tax, and they are successful in their prosecutions north of 95% of the time.
Innocent spouse relief is viewed very critically by the IRS, but that's likely your first stop to articulate to the IRS how you qualify given the facts - if you do qualify.
Best of luck
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