Tax Audits Are a Common Result of Divorce

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Tax Audits Are a Common Result of Divorce

The last thing anyone wants to experience is a divorce. It’s a process that everyone hopes to forget. However, one of the worst ways to be reminded of it is by receiving a “tax audit.” And if you think this is something that could never happen to you, just look at the statistics. More than 50 percent of all marriages end in divorce. Based on CDC, 6.8 marriages per 1,000 people in the U.S. are married and 3.6 marriages per 1,000 people divorce.You ask how does the IRS know that they should audit you from the divorce? Well, that’s simple. While divorce often can be contentious and painful, things like hidden assets and undisclosed income will always be exposed in a divorce proceeding because of the required “forensic audit.” These facts are reported by forensic accountants to determine the value of all income and assets for “equitable distribution.” This then goes to the Judge who is required to review all facts and circumstances to determine the distribution or final judgment. The Judge is also required to report any inconsistencies to the IRS under their ethical requirements. In essence, the Judge is legally required to report these facts to the IRS for a tax audit.

After a divorce, the IRS has three years to audit your finances during the marriage. This period can be prolonged depending on the scale of “discrepancy” or the existence of “fraud.” If there is a discrepancy over 25 percent, the review period or “statute of limitations” will be extended to 6 years. If fraud is involved, it could extend the review period indefinitely, thus causing the IRS to always audit you for fraud.

What happens if you are innocent but the IRS audits you because of an ex-spouse? In this case, an option that might be available to you is the “innocent spouse relief.” In cases where you are completely innocent, you may ask the IRS to assign the fault to the “right” spouse or the spouse who is guilty. Three types of cases are possible: (1) innocent spouse relief, (2) separate of liability relief or (3) equitable relief.

If your spouse failed to report income, reported income improperly or claimed improper deductions or credits, Innocent Spouse Relief provides relief from additional tax you owe.

Separation of Liability Relief provides for the allocation of additional tax owed between you and your former spouse or from a current spouse whom you are separated due to an item not being reported properly on a joint return. You then are responsible for the tax allocated to you.

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 most generally attributable to your spouse. You may also apply for equitable relief if the correct amount was reported on your joint return but the tax was not paid with the return.

These are the general rules but qualifying for these types of relief is taken on a case-by-case basis. This is why it is important to discuss any tax scenarios regarding your ex with your divorce attorney or get professional help from an accountant who deals with matters like these specifically.

If you are facing a divorce, Stange Law Firm, PC can help. As a firm that focuses exclusively on family law, it has the attorneys with the knowledge and experience to get you what you need in terms of child custody, child support, paternity, and asset and property division.

To schedule a confidential consultation to meet with an attorney, call Stange Law Firm, PC at 855-805-0595 or visit us online.

Source: Divorce Causes Tax Audits, By Cameron Keng, Forbes


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