IRS may be interested in divorces

On behalf of Lake Toback Attorneys

Illinois residents may not realize that getting divorced can trigger an IRS audit of their finances. The process of dividing property during divorce may reveal hidden assets or income that the judge is required to report to the IRS. The IRS may also learn of divorce through filing status changes on tax returns. Marital finances may be audited up to three years after divorce. This time for review increases to six years for irregularities greater than 25 percent, and indefinitely for suspected fraud.

When financial discrepancies are determined to involve one spouse, the other spouse may qualify for protection. One type is Innocent Spouse Relief, which protects from additional taxation if income has been reported improperly or credits or deductions inappropriately claimed. A second type of protection is Separation of Liability Relief, which separates the liability of the two spouses. The third type of relief is Equitable Relief, which may apply in cases of improperly reported income, or taxes unpaid on correctly reported income.

According to the CDC, breakups occur in 41 percent of first marriages, 60 percent of second marriages and 73 percent of third marriages. Of all marriages, more than 50 percent end in divorce, and the length of the average marriage is eight years. First marriages tend to end at around age 30, when significant assets have been accumulated and income attained. Statistically, many people are going to be divorced at least once in their lives at some point.

Divorce often involves a complex determination of property held and property division. Knowledge of the various types of assets, property valuation and tax law may be helpful in crafting an equitable settlement. Experience in settlement strategy may make a significant difference in post-divorce finances, and even impact retirement plans.

Source: Forbes, “Divorce Causes Tax Audits“, Cameron Keng, February 10, 2014

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IRS may be interested in divorces