Two dreaded legal actions often occur in the early months of the year; winter is a popular time to divorce and most people are required to file a tax return before April. Unfortunately, certain actions that take place during divorce proceedings may also make it more likely to receive a tax audit. In addition, many divorcing couples have questions about how their divorce will affect their taxes. When do they file as single? Who claims the deduction for any children?
Finances are often a reason couples find difficulty in marriage, and arguments about money are a leading predictor of divorce. Adding to the emotional burden of divorce can be financial considerations. In addition, if one spouse was hiding assets or committed fraud on a tax return, it is more likely to come to light after divorce.
As part of the divorce process, each spouse must present a thorough and accurate depiction of finances. Often, this will involve a CPA or other financial professional who analyzes assets. If one spouse has hid assets or underreported income on tax statements, it may be revealed during this process. Because a divorce must be approved by a family law judge, who is ethically required to report inconsistencies to the IRS, and audit may come from this investigation.
A tax audit can affect both spouses, even if only one prepared tax returns and managed finances, if the tax return was listed as married filing jointly. An ex-spouse who truly had no idea of fraud may obtain “innocent spouse relief” from the IRS, but must show the agency that he or she had no knowledge of the fraud
As a general rule, the IRS has three years to audit a return; this can mean an audit may occur years after the divorce is final. If the IRS does suspect fraud, there is no statute of limitations and the IRS can investigate any previous return.
An important part of filing a tax return when newly divorced is to establish which deductions each spouse can make on a tax return. Only one parent can claim a child as a dependent on his or her tax return; who can do so can be negotiated during divorce proceedings if both parents share physical custody of the child.
If alimony or spousal support is awarded, then the payor spouse can deduct those payments, while the payee spouse must report it as income. Child support payments, however, are not deductible nor considered income for tax purposes.
Just one part of divorce
There are numerous issues to resolve in divorce, not least of which is that finances and tax information will change, in some cases significantly. Individuals considering a divorce should speak to an experienced family law attorney to discuss the legal and financial options in divorce.