A study revealed that 60% of taxpayers actually need the help of a professional to get through their own return. This means that 6 out of 10 people need the help of a tax professional to minimize the possibility of committing errors and minimize the probability of being audited. According to a tax expert, one factor that increases the likelihood of being audited by the IRS a painful and ugly divorce. According to Forbes, an ugly divorce results to a still unhappy ex-spouse who might think of reporting you to the IRS to inconvenience or spite you.
Divorce is something no one wants to experience. But the reality is that around 1 million divorces happen every year. That’s 50% of the 2 million or so marriages that occur annually. According to the Census Bureau’s American Community Survey, which is the best annual national data source for marital events, the number of divorces per 1,000 married people was 19.0 in 2012. That’s why we all need to know more about the possible effects and consequences of divorce.
After a divorce, the law allows the IRS three (3) years to audit your finances during the marriage. This could be even longer depending on the scale of the “discrepancy” or the existence of “fraud.” Now in case you learn that the IRS is auditing you, you have to remember that being selected for an audit doesn’t necessarily mean that you did something wrong. Perhaps there might just be something in your tax return that got you flagged for an audit, or you could have just been randomly selected. In 2011 alone, 1,724,728 returns were audited out of the 184,596,616 that were filed. So it’s not at all impossible to be one of the more than 1 million-and-a-half people in the United States who become subjects of an audit.
You have to realize that the IRS has the biggest database of personal information ever collected on American citizens. Notice of marriage is required to be disclosed by filing as (1) Married Filing Joint or (2) Married Filing Separately while divorced individuals are required to file as either (1) Single or (2) Head of Household. As difficult and painful divorce is, it can even actually become a recurring nightmare if ever the IRS audits you after your divorce. Because of the required “forensic audit”, undisclosed income or assets and other facts can get exposed in a divorce proceeding. These are collected and reported by forensic accountants to determine the amount of all the income and assets that will be subjected to “equitable distribution.” The Judge is required to review all the facts and circumstances as well as to report or refer any reasonable inconsistencies to the IRS under their ethical requirements. Thus, the Judge is legally required to report these facts to the IRS for a tax audit.
There are more Americans now who go through divorce more than just once. And every time someone goes through the process, the judge might think that person could somehow be violating tax codes. The possibility of being audited after a divorce that involved complex property division issues is something that ex-couples must be ready for.
The stress from divorce goes well beyond dividing assets and negotiating an agreement on child custody and visitation, especially when things don’t end on the best of terms. Divorcing couples have a lot of anxiety so it often times becomes very difficult to communicate with and to get information from the other party. That lack of communication can lead to circumstances that eventually result to an IRS audit.
Here are some common red flags that you need to watch out for because these can increase the possibility of being audited by the IRS during or after a divorce:
Undisclosed assets and underreported income. According to Forbes, hidden assets and undisclosed income can lead to a red flag from the IRS. These can happen during the property division determination part of the divorce. Do not attempt to underreport income or not disclose certain assets – like others have done –just to try to get a larger portion of the marital property. A review of the marital assets is conducted as part of the divorce and judges are ethically obligated to report any inconsistencies that they may discover.
Missed deadlines. Individuals who are attempting to file taxes after a divorce might need information from the ex-spouse. To ascertain the correct preparation and timely filing of your taxes, give yourself more than enough time to gather and secure all the documents and information you need from your ex-spouse.
Your filing status. The IRS only cares about one day with regards to your filing status — December 31. To clarify, if you are married on December 31, then it is as if you are married for the whole year — whether you married on New Year’s Eve, or 20 years before that. On the other hand, if you get divorced by December 31, it is as if you are divorced for the whole year. For example, if your divorce was final by December 31, 2012, then you cannot file as a married person for your 2012 taxes. Your filing status options are “Head of Household” or “Single.” Keep in mind that if you will be filing as “Head of Household”, you should meet all the requirements to qualify under that status. Generally, the one who has custody of the child/children for more than half the year (even if it is only one day) can use this designation. IRS regulations state that the parent with whom the child spends more time may claim the child as a dependent. However, this can also be negotiated. For example, the parent who had custody of the child for more than half of the year may opt to allow the other parent to claim the child as a dependent. But this must be stated in writing and the parent must execute the required IRS form (Form 8332).
Support. You have to be mindful on how support is claimed on your taxes. Spousal support can be deducted but child support cannot. In the view of the IRS, it is a parent’s legal obligation to financially support his/her child. On the other hand, alimony (spousal support) must be reported as taxable income by the recipient and can be deducted by the payer, unless you agree otherwise. You can deduct spousal support payments on your income tax return, but not child support or property distributions.
These are only a few of the things that the IRS looks into after a divorce. If ever you are going through a divorce, it would be good idea to get some legal advice. Taxes can be complicated in any year and any person who is divorced or is headed towards that road should certainly consult with a legal expert to ensure that the taxes related to marital assets and support are taken into account and also to minimize the risk of an audit after the divorce is complete.