Tax Audit after Divorce, Insult to Injury
Tax season approaches! Taking care of taxes and income for a couple can be difficult under temperate circumstances. Thanks to the intense reporting requirements of the IRS, marriage endures another level of sharing and subsequent dividing after divorce. Many clients aren’t prepared when they are subject to tax audit after divorce, but with the right information, you can avoid adding insult to injury.
Married couples start off their journey by reporting their marital status to the IRS by selecting either (1) Married Filing Joint or (2) Married Filing Separately. When a couple divorces, the divorce must be disclosed by filing either as (1) Single or (2) Head of Household. With the dismal percentages of divorce on the rise, many will wonder when to file as Single or which items to report jointly.
For spouses who are caught off guard by a tax audit after divorce, there exists Innocent Spouse Relief. When a spouse is innocent in the suspected fraud, he or she may request the IRS assign fault to the party who is at fault. Determined on a case by case basis, there are three types of relief.
1) Innocent Spouse Relief: relief from additional taxes owed as the result of a spouse or former spouse who did not report income, or did so improperly/fraudulently.
2) Separation of Liability Relief: type of relief that allows additional tax owed to be allocated between you and the other party as the result of an item which was not reported properly on a joint return. You would be responsible for whatever is deemed to be your individual portion.
3) Equitable Relief: for those who do not qualify for the above forms of relief for something which was improperly reported on a joint return, and may be generally attributed to the spouse. This may also be utilized if the correct amount of tax was reported on the joint return, but the tax was not paid with the return.
Even if you get through the first tax season after divorce, the IRS still has another two years (three total) to audit your marital finances. As if living them was not bad enough, the IRS can revisit for a varying period of time after the divorce; the time frame is dependent upon how bad the suspected fraud. For a discrepancy over 25%, the review period or “statute of limitations” can be extended to six years. Any existence of fraud can cause the review period to go on forever and the IRS can continue to review indefinitely.
Often a major part of the divorce process is the discovery portion, whereupon parties exchange requests for documentation and/or answers to questions regarding all aspects of their financial history. This is intended to disclose all possible assets and liabilities that will be divided during equitable distribution. During E.D., a judge will review the information and decide who gets what – but when there are issues with the information, a judge is required to share them with the IRS.
Having an experienced divorce attorney or CDFS (Certified Divorce Financial Specialist) can help hedge off any problems at the pass by way of thorough review of discovery prior to equitable distribution. While tax professionals and accountants can be called into the process, a skilled divorce lawyer or CDFS has the knowledge of when and why a client may have a tax audit after divorce. Our office offers this level of confidence to clients.
Call our office today at (215) 693-6191 to schedule a consultation with a Bucks County divorce lawyer. Or feel free to complete the inquiry form and a member of our team will contact you shortly to schedule an appointment.