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Which is worse?  The IRS or your ex?  Hmm.  This may take a minute.  Let’s not be hasty in your decision.  Ok. Let’s say for the sake of possible audit, your ex is not the worst of the two.

After all, you were legally able to end your relationship with your spouse.  The IRS and you will be in a long lasting relationship for the rest of your life.  It’s forever and, unfortunately, ever.  So you're taxed until death and since you're not dead, let's talk taxes. 

Let’s focus on a few common tax problems or concerns that arise during divorce.

What to know at the beginning of your divorce.

You'll need to work with your attorney, accountant and spouse to determine the current year’s tax liability at the beginning of your divorce.  This will allow you to adequately plan for any liability or refund which may be higher based on your filing status or other changes associated with the divorce.  It will also help you decide if you and your spouse would have an advantage to filing a joint or separate return while legally separated.  Upon determining an agreement regarding your pending taxes, you should have your legal advisors develop a written agreement for both you and your spouse to sign and have notarized.

Should you file jointly while separated?

Based on your current tax liability when filing jointly or separately, you and your spouse should consult the tax and legal professionals who, along with both of you, can determine which filing status would be more beneficial.

However, if your spouse is less than cooperative and/or you foresee issues that may arise causing a delay in filing, undue excess legal fees or general discord interfering with the divorce process you'll possibly be advised to file separately.

If you file jointly and issues arise, you will be unable to amend your return after the due date.  However, you're currently allowed to amend your single filing return to a joint return if you and your spouse elect to do so.  Refer to your accountant or the IRS for more information.

If you are unable to get your previous years tax information from an uncooperative spouse, your attorney can request these documents for discovery.  You can also contact the IRS to get copies of previous returns so that you have the necessary information to file a separate return.

Does an indemnity clause in your divorce agreement protect you from tax liability on joint returns filed with your former spouse?

Like credit liability, the IRS is unconcerned about the specifics in the divorce agreement that determines who will pay the taxes, if any for specified years.  If you file a joint return, both spouses are liable for any tax due, penalties and interest, even after your divorce agreement has been executed.

What is your liability when filing a joint return?

Filing joint returns increase your risk if your spouse misrepresents his/her tax information.  For information related to the avoidance of relief of liability in the case that your spouse has been dishonest on your joint return please visit www.irs.gov “Spousal Tax Relief Eligibility Explorer”, “Tax information for innocent spouses.” Contact your tax advisor for additional information.

What are the cut-off dates for your filing status during and after your divorce?

Married filing jointly requires you to be married up to and inclusive of the last day of the tax year (Dec 31) even if you are living apart.

Married filing separately requires you must be married up to and including the last day of the tax year.

Single filing requires you must be unmarried, legally separated or have your marriage annulled as of the last day of the tax year.

Head of Household has numerous stipulations related to filing.  If married you must have lived physically apart since before July 1 of the tax year.

What happens when your spouse settles with the IRS on a joint return?

If your spouse makes what is called an “offer in compromise” to settle a tax bill, the IRS may still require the other spouse who is not part of the IRS settlement agreement to pay the difference.  If the spouse who is not part of the agreement remarries, then the new spouse could also then be accountable for the balance of the liability despite being completely uninvolved with the arrangement made by the previous spouse.

Does an annulment affect a tax return previously filed jointly with your spouse?

Yes.  In this case you will need to file corrected returns for the previous three years if joint returns were filed during those years.  The IRS considers a marriage that has been annulled to never have existed.  So filing jointly would be completely incorrect filings.

Does the payee owe taxes on a lump sum settlement in lieu of alimony payments?

Recent changes to tax laws now do not offer the payor a deduction, nor does it require the payee to claim the settlement as income.  Refer to your attorney for advice as to how this affects your specific case and settlement options.

How does capital gains tax affect real property and investment division in my divorce?

If your spouse and you decide to split assets evenly, you should be aware of each asset's risk of gains tax and/or depreciation and losses taken on a previous years return.  There are numerous situations that can take place with tax liability upon division of assets.  Refer to www.irs.gov/taxtopics/tc701 for some information as it may apply to your circumstances.  Consult your divorce attorney, accountant and/or tax attorney for complete guidance in this matter.  The important thing to know from this tip is that there are different liabilities for every asset and you should be aware of the implications prior to their division since the asset's tax liability can grossly offset the balanced division of all assets to each spouse.

Can the IRS withhold my refund on a joint return if my spouse failed to pay child support or alimony as stipulated in a divorce agreement with his former spouse?

Yes, but you may be able to get your share of the refund back if you qualify for injured spouse status specified by the IRS.  You will need to submit form 8379 to the IRS.  The form can be found at www.irs.gov.

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