Tax Returns and Divorce
Taxes are one of life’s inevitables. You cannot avoid it even while getting a divorce. In this blog post, I lay out three things to understand when dealing with tax returns in divorce.
- Why you need to get advice before filing a return with (or without) your spouse
- How unfiled taxes can come back to haunt you
- Be on the look out for fraudulent or false tax returns
Filing Tax Returns Before, During and After Divorce
I harp on this constantly to my family law attorney friends. Divorce and taxes are complicated. You need to crunch the numbers first before filing a tax return.
Once you file a married filing joint tax return, you cannot unring the bell. Unless you qualify for innocent spouse (I will post about that soon) and that is a tough hill to climb. More often then not you are stuck. So before you file a return run the numbers both joint and separate.
Another thing to be careful of is both before and after divorce. Most people don’t plan to get divorced but if you are thinking about it then is it wise to file a joint return with a soon to be ex-spouse? Also consider what happens post divorce? Items on your tax return filed during marriage can be allocated between spouses. You may be able to reduce your post-divorce taxes. If you want to have a bargaining chip maybe allowing the other spouse to get a deduction or credit earns you a concession you want in the divorce.
Just be careful and get advice before you file to avoid problems later on.
Unfiled Tax Return Nightmare
Maybe the last time you filed a tax return was when Bill Clinton was president. Unfiled tax returns are a nightmare even if you are not getting divorced. The IRS is on the hunt for taxpayers with unfiled returns. Now with most people being paid by check or direct deposit it has become harder to hide from the IRS. If you and your spouse haven’t filed your tax returns then seriously consider having the returns prepared to determine what taxes are due.
You should also consider if there are unfiled returns whether or not it makes sense to file with your spouse. If your spouse has terrible records or is not honest then consider filing separately.
If you have unfiled returns there is a silver lining. The IRS does not require you file all unfiled returns. You only need to file the last six years of returns. Be careful though, each state’s rules are different and so you may be required to file more returns than the IRS requires. A good tax professional will know what your state’s tax filing requirements are.
False or Fraudulent Tax Returns
Most people are honest. However, there are people who lie to pay less in taxes. Shocking, I know. If you filed a joint return with your spouse and the return is false or fraudulent you need to be careful. Beyond it being a crime, a false or fraudulent return is not reliable. A false or fraudulent return misstates your household income. Most courts look at tax returns as reliable and it may impact any alimony or child support payments. You should talk with tax professional as well as your divorce attorney as soon as possible.
Thankfully, you are the honest one but what if you suspect your spouse has lied on the return? What should you do? You should speak with your divorce attorney about your feelings. Many divorce attorneys believe tax returns as filed are accurate. If you have a reason to suspect a tax return is wrong, make sure to show them where the discrepancies are. If you have supporting documentation even better. Your attorney is more likely to act if he or she can show the court something in writing which brings the numbers on the tax return into question.
If your spouse is self-employed or a partner/shareholder in a family business then you may want to talk to your divorce attorney about hiring a tax professional to ensure the returns provided to the court are accurate. It will cost you to be sure. Still, if your benefits are reduced or you receive less than your fair share the cost may be worth it. Don’t be pennywise but pound foolish, as the expression goes.
Just be aware these are just three big issues that come up most often. Tax returns are complicated and divorce makes them more complicated not less. You should talk with a tax professional before agreeing to any final settlement in your divorce. It could save you thousands or tens of thousands in taxes, interest and penalties!
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your unpaid taxes, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.