While your family law or divorce attorney is likely to recommend that you obtain the advice of a CPA, accountant or other tax professional when going through a divorce or family law matter, it is important that you hire an attorney who has an understanding of how tax issues will affect your financial settlement or the outcome of other things such as child support, maintenance or other family support obligations.
Generally, it is in the financial best interests of a divorcing couple to proceed to file their taxes jointly, even if they are going through the process of separating and/or divorcing. However, there are some reasons why a couple may choose to not file jointly. For example, if one spouse has a business and the other spouse is concerned that they are improperly accounting for or disclosing money or income through the business or improperly taking deductions or mixing personal deductions with business deductions in their business accounting, it may be important for the aggrieved spouse to not proceed to file jointly, thereby “agreeing” to the year’s financial disclosures made by their spouse.
If you are uncertain whether it is appropriate to file jointly with your spouse or not, often it is best to file separately. If your returns are filed separately, you can later amend your returns to file jointly. On the other hand, if your returns are filed jointly, you cannot amend your return to elect an individual status.
When Should You Elect to File Separately?
Generally, it is more financially advantageous to file jointly with your spouse. If you are weighing options, it might be best to file an extension. An extension can be filed jointly or separately. Regardless of the type of extension filed, an alternative status can be filed. For example, you can file a joint extension, but still elect to file taxes separately. Similarly, you can file a separate extension but then later elect to file jointly with your spouse. When people elect not to file jointly it is almost always because of concerns about disclosures or honesty in returns. While a judge or court cannot order a party to file jointly, the judge or court can hold it against a spouse (i.e. consider the loss to the marital estate) of the difference in value of tax filing if a spouse unreasonably refused to cooperate in filing jointly. Thus, if true concerns for joint filing exist a spouse can refuse to file jointly but he or she should be prepared to explain the specific concerns that led to the refusal to cooperate.
If you are concerned about the accuracy of a return or disclosure made by your spouse at the time of a divorce, you can make a request to see certain documents surrounding the issues in dispute to allow you to research your thoughts and position. Generally in business tax filing situations, the documents you would want to review may include things such as the general ledger, the ledger of personal expenses run through the business, the business bank and credit card statements, among other possible documents.
What Can You Do If You’re Not Certain You’re Comfortable with the Filing of a Joint Return?
Rather than cost the marriage assets potentially significant funds due to a refusal to jointly file, you may want to consider an indemnification agreement. This would indicate that you are not liable for any tax deficiency and that you are entitled to receive copies of any notices received by either party regarding potential tax liability.
What Assets May an Inexperienced Lawyer Be Missing?
In some situations, particularly with a spouse who has significant income and/or business assets, money may be sheltered in extension payments and/or estimated tax payments. In these situations, a spouse pays for quarterly estimated taxes or estimated taxes through the filing of an extension but overpays for what is actually required or necessary. In other circumstances, you may fall victim to under-estimating your tax requirements and thus, have a sizeable tax bill at the end of the year that was not accounted for in the division of assets. In other situations, significant tax credits or benefits may need to be evaluated and divided such as carry forward business losses.
Where No Agreement or Order is Entered, Which Spouse Has the Right to Claim the Kids?
The IRS has a test for this where no court order or other written guidance is available. Generally, the spouse who has more than 50% of the overnights is entitled. If the parties are exercising a true 50/50 parenting schedule, they may not be able to provide the IRS definitive proof of having exercised more than 50% of the time. In these situations, the IRS guidance and regulations say that the spouse with the higher AGI (adjusted gross income) is entitled to the deductions of the children.
What Should You Do if a Deduction is Improperly Taken By Your Spouse?
You will have to prepare and file a paper return. Unfortunately, this can take years by the IRS to sort out, in some situations, but this is the only mechanism available at the present time to dispute an improper filing by your spouse or former spouse.
If you anticipate a divorce or other family law situation in Kansas or Missouri, please contact our office today to discuss your situation and schedule a consultation. While we are not tax professionals, and we would encourage you to obtain valuable advice regarding your tax situation from a trusted professional, we can help you understand how various tax issues may affect the distribution of your marital estate, as well as other family support obligations. Call our office today at (816) 208-8130 to schedule your consultation.