Tax Problems For Better Or For Worse!

TH Content Area 4.1 Divorce

When a family is falling apart, finances and especially taxes often get neglected. The stress of dealing with the court system, custody, and the day-to-day life overshadows other responsibilities. IRS tax problems are even more common in break ups where abuse is reported.

Taxpayer’s emotional and money resources are concentrated ending the marriage. Tax documents are lost, and taxes might not get filed or paid. Spouses use their wages on child support, lawyers, and maintaining multiple residences. IRS tax problems are even more common in break ups where abuse is reported.

IRS issues may be discovered prior or during the divorce, thus causing more arguments and magnifying the adversarial process.  However, even bigger tax problems may show up years after the divorce is final.  A 5-8 year window to hear back from The Internal Revenue Service is not uncommon, especially on audits or unfiled taxes. The tax problem then gets even more complicated if one or both ex-spouses are remarried, potentially dragging the new spouses into the tax mess.

How The IRS Problem Happens.

In a break up, audits and delinquencies are caused by various factors:

  • One spouse controls all the tax records and filings
  • All financial resources went to legal fees or other divorce expenses
  • Spouse was  abused and moved out leaving important info behind
  • Lost tax records
  • Tax returns were not filed, or filed incorrectly in a rush
  • Audit notices or IRS tax bills were ignored

What You Can Do

Even after many years, there are various strategies available for resolving your IRS problem: The resolution to the tax problem varies based on your current situation, as well as the actual cause of the tax problem.  If you believe that the tax bill is wrong, you can ask the IRS to reopen the tax year through audit reconsideration. You can submit any missing tax returns and claim your deductions.  If you believe your spouse was the cause of the tax situation, you can file for innocent spouse relief. If you had a good reason for the tax mistake or late filing, you can ask the IRS to forgive penalties through a penalty abatement. For many taxpayers, it may take years to recover from the emotional and financial disruption caused by the break up.  If you are still experiencing a financial hardship after a divorce, the IRS may delay collections until you are back on your feet.  You may also qualify for a reasonable installment agreement. If you can prove that you cannot pay the liability in full an offer in compromise may provide a fresh start. If you are not able to get relief under various IRS programs, you can look into a tax bankruptcy

Innocent Spouse Relief

When a married couple files a joint tax return both taxpayers are jointly and individually owe the tax due on the form, even after the divorce. The IRS can come after either spouse, even if a family court judgment or agreement dictates that only one spouse is liable for the joint tax debt. An ex- spouse may be liable for the tax due even if the other spouse was responsible for earning all the taxable income in that year.

In some cases, an ex husband or wife may avoid the tax debt on a joint tax return under the following three relief programs:

  • Innocent spouse relief.
  • Separation of liability.
  • Equitable relief.

 Filing Late Taxes after a Dissolution

You will need to determine if you want to file back taxes jointly with your former spouse or separately. Joint return will create liability for each spouse for the full amount of the tax debt. The IRS would be able to collect from either spouse, even if only one spouse had income. By filing a joint return with a former or separated spouse, you will also be responsible for any mistakes or audit assessments made on that joint return, even if you did not know about it.

If your former spouse made most of the income, you need to evaluate if you want to be on the hook for a joint tax balance.

What Information Is Needed To File?

Depending on your employment and financial dealings, you ay need: business records, bank records, W-2‘s, 1099’s and any other documents that may be available for each tax period. You may request missing info from various sources. Banks, suppliers, former accountants, customers, and even the IRS, State Agencies or Social Security Administration are all good resources for old tax document.

What If I Don’t Have Records To File My Tax Return?

During or following a break up, at least one of the spouses claims not having the necessary information to file taxes with the IRS. Filing accurate tax returns requires records of income and exemptions. There are many other sources of your tax records.

What if I don’t have my W2 Forms?

If you are an employee, you will need your income and withholding information. Here are a few helpful sources:

  • current employer
  • past jobs
  • state and federal agencies
  • banks and financial institutions,
  • investment firms and brokers
  • insurance companies
  • social security administration
  • spouse or ex- spouse
  • storage units and boxes in the garage

I don’t have my business records

If you are self-employed, you will need to locate your income and business expenses. The following sources may be helpful:

  • state, local and federal government
  • past and current customers
  • banks
  • finance companies
  • vendors and former vendors
  • old accounting software
  • old computers and storage devices
  • current or former employees or contractors
  • accountants, lawyers, other professionals

You will need time to locate, interpret and organize the information prior to filing.

Tax Strategies for Moving Forward

A divorce can leave a person temporarily unable to meet their obligations, including IRS tax debt. The key word here is “temporary”. Maybe you need time to borrow against, or sell and asset that has equity. Perhaps your income is currently less than your earning ability, or you are unemployed. The IRS may place you on uncollectible status, granting you time to get your finances back on track, without worrying about levies and garnishments.

A hardship status does not reduce or wipe out the tax debt. The IRS fully intends to get their money in the future, with penalties and interest. The IRS only agrees to delay collections (including levies and garnishments). However they may still file a public tax lien to secure their interest.

Other programs such as the offer in compromise, or penalty abatement or audit reconsideration may also be used in conjunction with the hardship status.

Related Topic: Illness

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