Transcript: Tax Strategies During Divorce
Good afternoon everyone. This is attorney Sara Khaki with Atlanta Divorce Law Group, and I’m joined by my good friend and tax guru, Jason Wiggam from Wiggam and Geer, a tax law firm here in Atlanta. Not only is Jason a great friend of mine, but he’s my go-to person for all things tax law. He has a Juris Doctorate degree in law and a master’s in tax law. So, all the credibility in the world to him and everything he is able to help our clients through, and everybody here in Atlanta with their tax issues. Jason, welcome.
Thanks, Sara, for the kind words and thanks for having me.
Of course. So, this is a topic that I think is an afterthought usually, when people are getting divorced, which is what are they gonna do about their taxes, how to deal with their taxes, what are gonna be the tax ramifications of some of the things that negotiated through the divorce process. And, oh, unfortunately a lot of times they come to you when it’s a little late, or we refer them over to you when they’ve already faced these big tax problems. So the point of this conversation is to give some general common sense, best practice advice to couples who are considering getting divorced or seeing their divorce attorneys right now, some things that they need to keep in mind while they’re putting these terms into their settlement agreements, or they’re battling so hard for certain terms in their divorce. And it’s just some important things that they can negotiate at the onset, or at least be aware of the liability so they can financially plan ahead of time. So, Jason, I first wanna go through with you our best case scenario. And in our world, in the divorce firm world, the best case scenario is two couples who are on the same page and they feel a mutual respect, mutual care for each other, but have come to the decision that they no longer can have a healthy marriage and that they need to transition into a different form of a relationship. And that’s when they are usually come to us at that point. And they asked for an amicable divorce, they decided late at night at the kitchen table, this is what you get, this is what I get. This is what is gonna be mutually beneficial for both of us. And that’s the key. Usually that couple that is at that stage, they don’t want to screw each other out of anything. They really just wanna do what is going to be best for both parties. And in those terms, talk me through a little bit about just general advice you would give that couple when they’re sitting down and they’re saying, well, you take the house and I’ll have primary custody over the children, but you get to come visit them this often, and then here’s how much alimony I’ll pay. When they’re kind of have a general understanding of alimony, child support, and the division of assets, what are some things you would want them to not forget and to consider in that general agreement that they’re coming up with together?
Yeah. I mean, obviously as a tax attorney, I’m always thinking about the tax consequences of things. And I think especially when it’s amicable, people don’t think about that and I get it. I mean, taxes suck. I try not to think about them unless I really have to, so I totally get it. But your filing status if it’s married filing jointly versus separately. Obviously the year of divorce, you’re not filing together, but if you have any unfiled years, generally you pay less in taxes if you file jointly. So if it’s amicable and the parties know everything, that makes sense to me. Maybe they’ve come out with how their assets are going to be transferred, or have a pretty good idea, but they should think about like the tax consequences of those assets. So like, if it’s a stock portfolio or portfolio investments, maybe there’s some built-in gains when you transfer the property between the parties from one to the other. It’s like a joint asset and they’re transferring their interests to the person, just so they own it by themselves. That’s not taxable, that doesn’t trigger a gain. It’s called a transfer incident to divorce but when the person receives it, when they sell it, many years later, whenever that is there could be a gain they have to pay. So that’s something to think about and consider when dividing up the assets.
There are certain deductions, like you can deduct your children, mortgage interest, and in all of these deductions might or might not benefit certain parties. So you should think that through too. And if sometimes you can negotiate them and receive them and other times you can’t. You can’t claim the mortgage interest deduction if you’re not actually paying the mortgage, but most cases, there’s some kind of shared custody. And so, children could be claimed by either party. So the higher income spouse might be that as a benefit whereas if one has a lower income, maybe they don’t even get the tax benefit. So those are kind of high level, big things I think they should think about.
So yeah, let’s break those things down ’cause you did a good job of kind of going over the general issues and let’s take them one by one. So, first of all, as far as filing jointly, your general advices is if your CPA, ’cause hopefully there’s a CPA in the picture. If your CPA sees that you could, what is the most typical such scenario which is a joint filing will get a better tax result, whether a lower liability or a refund, they can file jointly even the year that they’re going through divorce. Is that correct?
Not in the year that it’s finalized, you have to file separately.
Until it’s been finalized, can’t they still file jointly?
Correct. So yeah, most, I mean, we’re always filing a year behind. So most people, even if it’s finalized in 2021, they still need to father their 2020 taxes. So that’s the one where it could matter. Just in general, when you’re married, you either file jointly or separately. 99, I don’t know the statistics, but a very large percentage of people filed jointly. And the reason is the tax code and all the policy behind it is set up to encourage that the tax rates are better. You get better deductions. Like why that is, I don’t know, I guess, well, I have an idea, but I won’t go into it. It’s really boring, but that’s just the way it is. And so, there are some situations which I think we will eventually talk about where you would definitely wanna file separately but if you have all of the information and it’s just about making sure the divorce estate is as large as possible, and we’re all on the same page, I would think filing jointly makes sense. Most tax preparers are going to push you to file jointly and most people, I mean, I meet a lot of people that don’t even realize that you could file separately. So, that sort of the general consensus there I think is right for this scenario.
Yeah.
Obviously everyone’s situation is different and I’m just talking, it’s a generic rule and we’re gonna talk later I think about some scenarios where you definitely wouldn’t wanna file jointly.
Yeah. And we’re gonna get to the point where the divorces isn’t so amicable, and that has its own can of worms. And we’ll get to the, we’ll get to the crazy cases there that I know you’ve dived into many times. Let’s talk about then the division of assets, the most common one being the home and the general rule of IRS is that if you receive any assets from the divorce order, this is not a, you don’t have to pay taxes on that. Is that correct deduction?
Yeah. So generally when you like transfer an asset to another person whether they paid you anything for it or not, that’s considered a sale for tax purposes. So, would normally trigger a gain or a loss. So your house, if you had a $250,000 gain built in it, it could be triggered. Here, the tax code set up that transfers incident to divorce are not taxable. So, the idea is any transfer within a year of the divorce is presumed to be related to the divorce as long as it’s between the two parties and then, any transfer within six years, as long as it’s covered in the divorce settlement agreement or some court order negotiated by the parties and there’s a written term, it would be too. So, generally speaking, most of those transfers aren’t taxable and if they are it’s because someone waited too long or it wasn’t anticipated but when someone hires quality family law attorneys, like you guys, that’s usually not an issue, right?
Well, that’s the goal, right? And let’s, so let’s clarify that ’cause it’s very common that a party has a home, neither party wants to live in the home after the divorce. So one party gets the right to the proceeds from the sale of the home but so that’s all the, really the divorce order decided that the home will be sold and the wife will get the equity of the home and it might take more than a year and that’s why the law has that six year window, that in case that within a year of the divorce order, you come across a asset that is from the divorce, you still have that six-year window to claim that this should be taxed deductible.
Yeah. And it just applies to the transfer from the husband to wife or vice versa. So if.
Not if you sell it or if you get something else.
Yeah, and so like your home, there’s another provision in the tax code, I guess we wanna encourage people to own home. So your primary residence, if you’re a single filer, you can exempt $250,000 gain and it’s 500,000 if you’re married and, I don’t have all the particulars, but when you’re divorced, you can still use the $500,000 exemption in a lot of cases as long as it’s sold close to the event. I don’t remember the timeframe. So I’m sorry about that. But, so for most people, your scenario with the home, it isn’t taxable, unless it’s a home they’ve owned a very, very, very long time and, or maybe they’re in a really hot area and it’s appreciated a lot. But for most people, your primary residence when you sell it, the gain is exempted due to that provision.
And then child support and alimony. Things changed drastically with the tax laws there in January of 2019. So, would you mind just kind of giving us that if your divorce was finalized in before January of 2019, what you’re looking at if you wanna modify and what you’re looking at for anybody after, from then on and till now really, to present.
Yeah.
So pre tax reform, the rule was child support, the payer can’t deduct it and the recipient gets it tax-free. So there’s no sort of tax consequences for child support. Alimony was different. You, the payer, whoever is paying the alimony could deduct it on their tax return against their income, but the recipient of the alimony pay taxes on it. So, I think a lot of the negotiation was obviously the high-income party wanted to get to classify as much as alimony as possible and, maybe the recipient didn’t want that income. They wanted it to be child support. So that was always an issue. And the IRS would audit people and say, well, that’s not really alimony and or both parties would claim different things on their tax return, and they’re having to audit both parties. And it was just kind of a mess. So, when tax reform came around they said, hey, we’re gonna treat alimony just like child support. It’s not income to the recipient, no deduction, but it created an issue, right? ‘Cause the law changed, and there preexisting orders out there. So, it was only effective January 1st, 2019 forwards, any alimony orders or settlements, anything finalized after January 1st, 2019 are subject to the new rules. So then it created an interesting question. Well, what happens if we modify it? And so, the IRS came out with guidance that basically says, if you modify a prior order, you can change the tax consequences, but you have to state it very clearly with specific language in the agreement. So parties can negotiate over that if they’re revisiting, if there’s a modification and I think it depends on the individual circumstances and who has leverage and what they want but that option is on the table.
And there’s another piece to that is negotiable between the two parties as far as the tax code is and that’s back to the the child support, claiming the children, right. Who gets to claim the children as a tax deduction. Do you wanna brush upon that real quick for us as well?
Yeah, and basically as long as either party could, as the parent and the child resides with them at some point, like throughout the year, you can negotiate who claims the deduction. It used to be, you could just agree to it. And it didn’t matter if they resided, if the child reside with the parent at all. Now there are some other strings attached but for most people, you could alternate years when maybe if the children do not live with one spouse for half the year or the, but that spouse is higher income. They could still claim them, those kinds of things. It’s negotiable. I mean, but I guess what I see is even if it’s a low income spouse, how the tax code is set up, there are a lot of benefits, a lot of free money that you receive by claiming children, they earn income tax credit, the child tax credit. So, both parties usually want the deduction or they don’t know. So like we talked about earlier, it’s definitely something they should pay attention to because I mean, I’ve seen tax returns where it’s like, my client makes $35,000, claims three kids, and she gets a $7,000 check from the government. I mean, that’s a significant raise. So, you would wanna consider that and make sure you don’t miss out on that benefit. And then the flip side would be if like say, her ex-spouse earned three, four or $500,000 a year, the deduction for the children can be a significant tax reduction for them too. So both parties are interested.
Yeah, claiming the children is a hot, hot topic in our world, the family law world, it’s a fight. It can be a fight and hopefully, usually we’re still being amicable. And the really, the default is the default rule is we usually look at the custodial parent, which means the parent who has a primary caretaker gets it, but they have, they can negotiate it out. And to Jason’s point, if you have any sort of visitation schedule, you have any sort of time with the children, which is rare that in most divorce cases where both parents are gonna be involved if that doesn’t happen. That both part parents usually do get time with the children. You can negotiate who gets to claim the children. And it doesn’t have to be the same parent every year. So, it’s one of the big issues that can cause a lot of back and forth. Again, if we’re in the amicable divorce boat where husband and wife are sitting at the kitchen table in the middle of the night, trying to figure this out, that’s wonderful because then they can use this as okay, I get this, what do you get in return sort of thing versus just spending tons of money on tax law and family law attorneys fighting each other (indistinct) over this issue. So now let’s go to that scenario where it’s not, usually not the ideal scenario, just one party does not know what’s going on financially. One party has all, knows all the bookkeeping, has been on top of all of the financials of the house. And it’s not an amicable divorce. They’re not on the same page. And one party feels like they don’t, they have the upper hand on what they know about money and the other one feels really weak. My, the biggest thing I hear from our clients here at Atlanta Divorce Law Group is, Sara I don’t even know if he’s paid the taxes in the past few years. Sara, I don’t even, he, I know that we had bills coming from the IRS. I know for the past five years he’s been taking cash out of the business and it’s very, very scary for them. Give me a little bit general information on what do we tell that client, that the spouse has been in the dark and has zero trust that the other spouse has been handling the tax liabilities properly?
Yeah. So this is, it’s kind of the world I play in, I guess.
It is the part you roll up your sleeves Jason.
Yeah, these problems come out and we help. I guess the first thing I would say is I do see scenarios where the person thought it was amicable and then, later, they discover information. I don’t, obviously, if you have a good divorce attorney, I don’t think that that would happen. But I’ve seen scenarios where everyone thought they were on the same page, information came out years later and you know, maybe they regretted some of the choices that were made when the agreement was reached. But yeah, with your scenario, they know, I think it’s, they’re not sure if spouse is cheating on their taxes. And what I mean by that is they’re typically self-employed, are they reporting all the income from the business? Are they committing tax fraud, are they like skimming money out of the business, not paying taxes on it, had tax returns been filed or not? Look, I’m a tax attorney, my wife and I file jointly. I take care of the tax returns and the entire process. And she trusts me and I have a master’s in law and tax. That makes sense, right. But, I think there are a lot of people in that scenario that are the same way. They’re trusting the other person and they violate that trust, they don’t file or I’ve seen where tax returns were filed, but the party’s signature was (indistinct) on them and the return is not accurate. So, if you discovered these things, you should definitely be concerned for a couple of reasons. One, if you file jointly or if you’ve already filed jointly, married filing jointly with the, let’s just call them the tax cheating, with the tax cheating spouse. The downside, the filing jointly is the government has the right to collect from either party. So the IRS, even if it’s not your income, the Internal Revenue Service can go after you. So what I see is it’s typically self-employed spouse. And then the other spouse gets a wage earning job. They’re receiving a W2. So, putting myself in the IRS (indistinct), it’s much easier to collect from the wage earner, the person who receives the W2. So they tend to get screwed, or at least when they come to me, that’s what’s happening. So in that case, if they had this information and had a choice, you should definitely file separately. You’ll, as an economic unit, more tax will be paid, but at the same time, why risk the liability, why risk their tax issues? You can always amend the tax return from married filing separate to joint. You can’t go the other way. The only way.
Say that again.
That is so important Jason, repeat that so everybody’s very clear.
Yeah, so when you file a tax return and you’ve made a mistake, you always have the right to amend it and fix it, okay. It’s called filing an amended tax return. So when you’ve filed married filing separate, you can file an amendment, both parties to say, hey, we screwed up. We wanna actually file jointly. If you start off married, filing joint, you cannot amend to separate. You’re not allowed to do that. The only way to remove yourself from liability is to seek what’s called innocent spouse relief, which I think we’re gonna talk about later. So I won’t go into it right now. So, sort of when in doubt if there’s any risk or concern, I mean, obviously try to get the other side to give you the information and investigate and see. But if you can’t get that information for whatever reason, I would file separately. ‘Cause it, the cost to amend, to hire professional is probably worth the peace of mind to know that you’re not gonna get screwed. So, that’s the first thing. A lot of people come to me though and they filed jointly because they were left in the dark and they didn’t know. So we look at doing innocent spouse relief. I think when you discover a tax issue ’cause I obviously I represent the people cheating their taxes too, sometimes it can be resolved and the parties should try to work together too. And what I mean by that is there’s this divorce (indistinct), and if there is money there, it will likely be used to pay the taxes. So both parties have an incentive to try to minimize the tax liability, right? Like let’s keep the pie to be split between the parties as high as possible. Now, I’ve also seen the good work that attorneys like you do, Sara, where it’s like, you know what, that was his fault. We’re gonna take it out of his, his or her, his or her share. So that might not necessarily be a concern but at many times if someone hasn’t filed for a number of years or, they made a mistake in not reporting certain income, you can voluntarily correct it and minimize a lot of the consequences of that. And so as long as it’s discovered and the parties can agree on what can happen, that’s a possibility. If you can’t agree, you definitely wanna file separately and not get involved with their mess or try to be an innocent spouse. The other thing we get involved in is the party who had the tax issues, ends up getting a tax lien or there’s some ramification of their non-payment of taxes. And the tax liens filed against the home. The other party receives the home, situations like this. You really have to think through because even though your divorce settlement agreement says, you’re entitled to the equity in the home, the government’s going to get the money due to the tax lien. So, like certain transfers incident to divorce from the divorce could defeat a tax lien and others might not. It’s very fact intensive. The timing matters. So like all of these things have to be considered. And usually where I start is what’s the party’s intention? Like where were they trying to go? And can we work backwards to get there? And it’s not, I tell them and maybe they wanna change course instead of moving forward to an outcome they don’t want.
So let’s talk about the innocent spouse defense, which is, I did not know that he was cheating his taxes. I did not know that she wasn’t paying taxes on the cash that was coming in from the business, or that he wasn’t, she wasn’t claiming the proceeds from the business as high because I know that’s very fact intensive as well, but from a high level, what can you share with us on that?
Yeah. So there are two types, or two different types of cases. So there is the understatement, which means someone didn’t report income or they claimed like false deductions. Like for instance, I deducted my Ferrari through my business and the Ferrari wasn’t actually for business purposes or something like that, right. And so the IRS comes in and removes the Ferrari. Your income goes up. So in those types of cases, it’s really about did you know about it? So, did the requesting spouse, the potential innocent spouse, did they have access to the business’s books? Did, were they aware that the Ferrari was deducted, right? And then there’s sort of an unfairness element too, but that’s the biggest thing that they know about it. The other type of case which is the more frequent one that we see is underpayment. So this is where a tax return was filed showing an amount owed and it just wasn’t paid. So, much, much more involved, more factors at play. And so I’ll just run through those and to your point, it’s definitely a fact intensive thing. So, very definitive answers here, just kinda high-level. But number one, it’s positive if you’re separated or divorced. Next, like who agreed to potential responsibility for this? Like, so if it’s addressed in the divorce decree or the settlement agreement or whatever, who’s responsible. So, obviously I feel like I’m just repeating myself here, but good divorce attorneys like Sara and her firm, they’re going to try to have the other side agree to responsibility, which is a good thing. And then knowledge. So here knowledge is like, did you even know there was this unpaid tax liability? I mean, in most cases, the line that you sign the tax return is right below the amount that’s owed. So the IRS has perspective is if you sign that return, you knew how much, whether you reviewed it or not, you knew the amount owed, right. So, did they actually sign the return? Like most tax returns are e-filed now. So, did they actually sign the e-file form? Did the other spouse forge it? If they were aware that the amount was owed, what were they told? Like did the tax cheating spouse here say they were gonna pay it, did they enter into an installment agreement? What’s the sophistication of the parties. If you do not have a financial education, if you have no prior experience with taxes, if you’re generally kind of unsophisticated as to the stuff, which a lot of people are, and it’s not a bad thing. If you’re like that, it’s more likely that you would succeed because maybe it’s more reasonable for you to believe that it was paid, or you didn’t understand what it was. Did you benefit from the unpaid taxes? So there, if tax cheating spouse took the funds and used it in a way that the government might view improperly, that’s not gonna work to your benefit. And if you’ve benefited from the thing. So if you guys took an expensive vacation to Africa or whatever, and you were along for the ride they’re probably not gonna look at that kindly. Those are sort of the big factors. And the other thing is, and this isn’t in the law it’s just practically speaking, will the other side cooperate? Because in my experience, these cases are, there’s very limited information other than what the IRS gets from the party. So we filed this request, that sign (indistinct) is a perjury that tells our client’s side of the story. IRS then reaches out to non requesting spouse here, the tax cheating spouse to say, hey, we received this and this is spouse request, tell us what happened. What do you think happened? So, if that person lies or disagrees with what you said in any way, it’s sort of the he said, she said situation, and you’re less likely to win. You can still win but we are likely having to litigate this case. It’s gonna be more work. Whereas if that person wants you to win, or like many people who have tax problems, maybe they don’t open IRS mail. They ignore it, and they don’t respond. That could be beneficial. So practically speaking in some of these cases, maybe the other side wants you to win because it’s in their financial best interest to do so. And that can work to your benefit. So I’ve seen that a lot but I covered a lot of ground, so I’m just gonna be quiet and let you go now.
No, I think of bottom line, if you do find yourself in the situation where you need to claim, you really believe you may have a innocent spouse defense, that’s not a situation to go out at on your own. You need to look into hiring a firm, like Jason’s firm and help them give you best case and worst case scenario. That is you’re not gonna be saving money on that one, trying to go at it on your own. You’re gonna be in a much worse situation. You’ve given a lot of good advice and some of it, I think.
Can I say one thing real quick?
Yes, please, please.
Quick story. So I get a lot of clients that started the process without us, maybe they self prepare the innocent spouse form and they’re rejected. And now it’s time to appeal or go to the US Tax Court then they engage us. Or their CPA or their tax preparer, someone started the process and yes, much better to engage us from the beginning, because a lot of people aren’t experienced with this and don’t understand and there are a lot of traps for the unwary. And I’ve just also seen a lot of really bad advice. We had a case where the advice given after the initial rejection was, well, this is a waste of time. You shouldn’t keep moving forward. And the client had never done this before. They were unsophisticated, so they believe this person. And, so they didn’t appeal. And there are timeframes that if you miss them, you’re done, it’s over. And so her federal innocent spouse claims failed and we couldn’t, like it was done. And before this person even came to us, but we were able to do an innocent spouse case with Georgia and we won, and I told the client all along. I’m like, look, if I, we could have gone to tax court. I mean, I couldn’t have guaranteed success, but they had a really good case. I mean, the perspective of the other professional my humble opinion was just wrong. So, I just wanted to quickly mention.
No, let me mention that because I wanna ask you if this is true for the IRS. My experience with most government agencies that have their own adjudication process is that they typically rely on denying and hoping that people either don’t appeal, or don’t know what they’re doing, or they don’t go get representation and that they’re just gonna drop off. They don’t really truly look at your application or your request to be heard. A lot of these agencies give you rubber stamp denials in the initial appeals process hoping you back off, you get intimidated, you get overwhelmed ’cause they’re overwhelmed, right, with all the bureaucracy and all the paperwork. So an easy way for them to sort of weed through this and say denied, denied, denied, and they know a high percentage of people who are seeking these reliefs will look at a no from the government and we’ll give up, or will not have the foresight or the sophistication to question it or go get an attorney like you to say, hey, this needs to be appealed. But here’s what’s concerning when you start that initial application on your own is that’s part of the file, right, if you didn’t hire Jason’s firm to file that initial innocent spouse application, whatever you put in there becomes part of the file. And then, you make I mean, as Jason just shared that story his firm can still come in and win the appeal for you. But you’ve now created a more of an upward hill battle for them to undo anything that was in your initial application that you put in without the advice of counsel that could bite you in the arguments that you wanna make for your defense.
Yeah. I wanna control the narrative from step one, to your point, someone could say something or admit something that they didn’t necessarily need to, and maybe it was well intentioned, but they hurt their case. So yes, you’re exactly right. And just quick comment. The IRS’s policy isn’t to deny everything but there are certain offices and parts of the process that are less friendly than others. So we definitely take that in consideration. For example, you have an administrative, you have initial determination that you can, which many people went at by the way, a lot of cases in there but that’s our goal to win it there. If we’re submitting it from the start but it’s accepted or rejected. If it’s rejected, you can appeal and you have a certain timeframe to do so. And it’s an administrative hearing. We generally don’t do that right now. I used to and the policy, we’re talking today, July 22nd, 2021. So if you’re seeing this in the future, maybe things change, but right now, it’s sort of a waste of time and legal fees and effort to appeal. I mean, we still will if it’s like a real clear case or something but if it’s discretionary, the office that sees these appeals pretty much rejects everyone. So, you can bypass that and just go straight to court. And so we do that and it’s literally because we care about our clients and wanna save them money. It’s like, hey, look, I love litigating. I love doing administrative hearings, but I’m only gonna do it if it’s in the client’s best interest to do so. It’s like why spend $5,000 in legal fees to do a hearing that we all know you’re gonna lose? That’s not necessary, right? So, I find that people don’t always believe me. I’m like, hey, let’s just go to litigation. I think they’re thinking, oh, you’re an attorney. You want more billable time. It’s going to be more expensive, that’s not really what’s going on.
No, and I can testify to that ’cause our law firm use Jason’s team to help us through the SBA, PPP, forgiveness, all the crazy applications. And that’s exactly the approach you guys have taken with us every step of the way is how to give us the optimal results without us spending billable time, your billable money and spend money on it. That wouldn’t be necessary. So that’s, you definitely stand out with that mentality.
Let me ask you one other scenario. Anything that we need to share or put into consideration for a family that’s going through an audit while they’re going through divorce?
Yeah, that’s a good question. So, and we have a few of these right now. So yeah, when you’re under audit after divorce. Yeah, they wanna talk to both parties and it’s, so the situation we have is, typically when you have like the full-blown audit where there’s a human being assigned and they wanna interview you and go through your bank records and the whole process. They’re gonna wanna talk to both parties, but here the auditor has told us that she is focused on a business and it’s not my client’s business. And my client has no access to those business records. So, we just got involved and we’re like, look, we’re here to cooperate, but there’s really nothing for us to give you. I’m happy to answer any questions you have but you need to talk to the other person. Now, they filed jointly. So, obviously we’re very interested in what happens because maybe she has an innocent spouse claim, right? If her husband didn’t report everything, her ex husband didn’t report everything correctly. But yeah, you still need to participate in the audit and which my suggestion would be hire representative, your qualified CPA or an attorney at least talk to the government agent on your behalf. And you’re gonna wanna know what’s going on. Even if it’s the other party is like income items or issues because if it’s a joint filing, you’re gonna owe it too, and you can assert an innocent spouse claim out of an audit, you can assert it to the auditor. You can assert it in tax court litigation. So when you’re audited and the government says you owe money, they are wrong. Quite often, we make a lot of revenue. We earn a lot of revenue disputing IRS auditors determinations, right? So, you can appeal it. You can go to court, you have all these due process rights before you actually owe the money. So you can take advantage of those before you ever owe it to assert defenses. So you, even if you think it doesn’t apply to you, you should participate to make sure your interests are protected. And then, I guess on the flip side, if you’re the person that’s sort of the target of the couple and you’re in trouble, I mean, definitely hire representative. If you’ve never gone through an IRS audit before, it’s not something that you’re gonna become an expert at and learn on your own time, right. So, definitely hire someone who’s qualified to handle it.
That’s good advice. So, just to wrap up here, Jason, I wanna kinda point out some of the most important things that I think people need to take away from this and correct me if I get any of it wrong. You have an amicable divorce, and you’re sitting down with your spouse at that midnight kitchen table and thinking through what are the things we need to put onto our settlement agreement. Don’t forget that who claims the children can be negotiable. Don’t forget that the house, if it has any liens on it, if it has any tax liability on it, or any of your assets have any liens on it, it will impact the person who ends up gaining it after the divorce. Since the January, 2019 alimony is not a tax deduction and it’s not a tax liability. Child support is not taxed and it’s also not a deduction. And I think that’s the main things for the people who are sitting down and thinking through it. Of course, there’s always the nuances and the specific facts but just from a high levels, some things to consider and.
Yeah, great summary.
And then also remember Jason’s point that any asset that you gain within a year of the divorce is automatically considered a gain from the divorce. So it’s not tax deducted. It’s not, you’re not gonna have to pay taxes on.
And make sure you tell your tax professional. They’re not gonna automatically, maybe they won’t put you together, right? Make sure you say, hey, this relates to my divorce when your CPA prepares the return. Or if you’re using TurboTax or whatever.
Yes. And up to, but you could still make the argument up to six years after divorce. And then, we have the cases where you don’t know what’s going on with the other spouse. And there could be tax liabilities. There could be years of taxes that have not been paid, a tax fraud going on that I like Jason’s term of the cheating tax spouse. If you suspect you are with the cheating tax spouse, I think the best advice you gave is file separately. And you reserve the right to amend later to file jointly and you cannot do the reverse. You can not start off in that situation and filed jointly and then later on decide oh, crap, I’m gonna get in trouble. So now I’m gonna go and file separately.
Yeah and one quick thing I forgot to mention on that, so what I see a lot of the time is, people don’t know about filing separately. So, one spouse has all their tax documents ready to go, and they’re waiting on the other one is procrastinating. You don’t have to wait. You can just file separately, right? You can move forward. When I deal with the IRS, I get this a lot where that spouse is like, well, hey, I did nothing wrong, I was ready to go and he, or she wasn’t. That’s not an excuse they’re going to accept. Whether you know about filing separately or not, they’re gonna say, well, hey, you could have just filed separately. So I think in many cases, best to just cover yourself and not worry about the other person.
That’s really good tip because it’s also very common in our office that we see one spouse that’s just so done. And wants to clean their hands of everything that still is tying them to each other. And this is sort of a good peace of mind for that spouse to know that you can go ahead and file on your own and move on, and you don’t have to feel so tied to them because of this tax issue. And then really finally, if your divorce was finalized prior to January of 2019, see a family law attorney to prepare your modification if that’s what you’re seeking so that they can put the specific language that Jason talked about on how you want the tax treatment to be handled under the new law or go back to what it used to be.
If you wanna change it, only if you wanna change.
If you wanna change that, yep. Jason, do you think is there anything else we need to give for people to consider?
No, I mean, I think.
Other than if you are in trouble call Jason now?
Yeah. (laughs) I mean, sometimes we can handle issues on a short paid consultation, if it’s not a problem. Or maybe there is a problem and getting someone involved early before it gets worse is really important.
We will share Jason’s office information in the comment section for those who wanna get a consultation, or wanna look into getting tax relief or tax help through their firm. And like I said, highly, highly recommend them. The level of integrity has been unmatched truly. And I know a lot of people that do what you do and you’re one of a kind. So I appreciate that and I also appreciate you getting so many people through 2020 with all your excellent, excellent tax and PPP and SBA, EIDL (indistinct) advice. And you stayed cool when the rest of us we’re losing it. So, thanks for being the calm in the storm there.
Yeah. Look, I might look calm and collected and even keel, but inside, it’s not always like that to be fair but I’m glad we were able to help so many people and help you (indistinct).
You make it look good. (laughs)
Thank you.
All right, Jason. Well, have a wonderful rest of your afternoon. Thank you for spending your lunch with me.
Thank you too, thanks. Bye.
