How to Minimize the Impact of a Divorce On Your Current Taxes
NEW YORK (MainStreet ) — Even after the proverbial ink has dried on their divorce papers, many couples are still on the hook for owing money on taxes.
Owing the IRS back taxes occurs more frequently than most people think, especially if one former spouse eschewed paying them, said matrimonial lawyer Steven Eisman, a partner at Abrams Fensterman in Lake Success, N.Y.
“Both spouses, regardless of their incomes, need to pay attention to the finances year-round,” he said. “Financial infidelity, in which one spouse neglects a major financial responsibility like paying taxes, is surprisingly common.”
Financial Infidelity Effects
Married couples need to understand the ramifications of one spouse not paying taxes. Financial infidelity is not an anomaly, and many people wind up discovering their spouse was dishonest with either how much money they earned or how much debt they had accrued, he said.
When a divorce occurs, your spouse’s back taxes or debt will “follow you,” Eisman said. Courts either rule that the tax liability be split between the two parties or that the spouse who makes the most income is 100% liable for the debt.
“Far too many Americans get married and never fathom one spouse being dishonest with his or her money situation,” he said.
The consequences of a large tax liability can be devastating. Your spouse’s tax debt can result a freeze being put on your bank account or a tax lien against your home, Eisman said.
While the reasons for committing divorce revenge vary drastically, many times one spouse will run up a massive tax debt, knowing it will be divided in a divorce, he said.
How One Husband Found Out He Owed the IRS Thousands
After 28 years of marriage, Robert Vanalden, a 66-year old aerospace project manager, arrived at his Manhattan Beach, Calif. home to discover it was completely empty of any furniture, which his wife, Emily, 64, took when she left. Only a week later as Vanalden attempted to put his life back together, the IRS froze his bank account.
After seeking advice from both a divorce and bankruptcy attorney and finding a large tax bill from both the IRS and the state of California, whose origins remained a mystery to him, Vanalden was referred to Vickie Adams, a local certified financial planner specializing in divorce and taxation.
Turning a blind eye, Vanalden had agreed when Emily offered to take their taxes to be prepared by a friend and signed them without further examination. After Adams spent a “few hours of quality time" with the IRS, she discovered that the wife had prepared fraudulent returns starting from 2009 for the next four years. Unbeknownst to Vanalden, Emily had also started to collect Social Security income in 2012 and didn’t disclose $22,000 of taxable income for 2012 and 2013, which left him on the hook for another $10,000 in taxes and penalties.
The IRS came after Vanalden, because he was the only one earning an income, Adams said. It turns out that once Emily had planned on leaving, she decided not to report the income and invented
fictitious items on their tax return in order to get larger tax refunds, according to IRS records. By the time the IRS audited the return, they found a large tax debt.
“By then, she had left with everything, but he will be responsible for that tax liability, because he signed a joint return,” Adams said. “He’ll never recover from this.”
While Vanalden case might be an extreme exception, if your marriage is rocky. don’t count on someone who barely speaks to you to be responsible for filing your taxes, she said. Ensuring that you accurately report and pay your taxes not only represents part of your financial well-being, but a failure to do so “can also destroy your life,” Adams said.
Tips For Married Couples During Tax Season
Determine whether you should file taxes together or individually. A joint filing is often seen as more advantageous, but there are some risks associated with it.
Couples often don’t realize that once they do file together, any unpaid tax or issues associated with taxes will follow them even if they divorce. “If you do file jointly, make sure that taxes are paid on time and that everything is reported,” Eisman said.
Filing separately when you are married puts people in a much higher tax bracket, and if one spouse itemizes the other one has to do the same. For some couples, it means they are paying thousands of extra dollars to file individually, Adams said.
If you live in a community property state like California, filing separately does not absolve you of paying the other person’s debt and taxes in a divorce, she said.
If you decide to file jointly and one partner is not working or earning a significantly lower salary, that person should sign an “indemnification agreement to ensure that the income producer is responsible for paying up when taxes are due,” Eisman said. In the event of a divorce, this measure will also protect top-earners against any failure to report income during the marriage.
Protect yourself by obtaining an authentic transcript of your tax return from the IRS, using form 4506 before you settle, Adams recommends.
“Don’t bet your financial future that your spouse was honest with you about how your taxes were filed,” she said.
If a spouse finds himself or herself a victim of financial infidelity, the IRS does have a clause called “innocent spouse relief.” Former spouses have two years to report their claim after the IRS’s collection notice, Eisman said. To plead such a case, the individual also must be prepared to present materials that clearly indicate that they were unfairly left liable for the past taxes.
If you filed your taxes together, but are divorced when the refund arrives, be aware that checks issued from a joint return are usually mailed to the address of record on the tax return. The IRS will not turnaround and issue two checks payable to each spouse separately, Adams said. Be sure to have a joint account or institution willing to cash that check and an agreement with your former spouse on distributing the check equally.Source: www.mainstreet.com