Divorce and taxes are two events that are difficult enough on their own. When paired together, this duo can be the thing of nightmares. A recent article in Forbes explored the issues that can arise during a divorce. Interestingly, the researchers with the report noted those going through a divorce can be at an increased risk of going through a tax audit by the Internal Revenue Service (IRS).
Divorce and tax audits, what's the connection?
Why would divorce and tax audits be connected? A spouse going through a divorce may be tempted to hide assets or fail to fully disclose income in an attempt to influence the property division of the divorce proceeding. During the proceeding, a financial audit is generally conducted. If there are inconsistencies between the result of the court's audit and the reported amounts, the judge presiding over the case is ethically obligated to report the discrepancies to the IRS.
What do I do if I am audited?
It is wise to take any inquiries from the IRS seriously. Seek counsel and respond to any questions providing the requested information in a timely manner. Avoid providing additional information or extra documentation unless specifically requested. If you are unable to provide the information in a timely manner, a postponement can generally be requested. These situations require the assistance of a tax expert. Unfortunately, an audit can occur years after a divorce has been finalized.
Specialized representatives can offer assistance and represent your interests. These specialists could include a CPA or attorney. This can also be helpful if considering an appeal. An appeal can be filed with the IRS Office of Appeals if there are concerns about the auditor's findings.
How can I avoid an audit?
The best way to avoid an audit is to be honest. Attempting to hide assets during property distribution rarely goes unnoticed. Unfortunately, there are cases when the IRS attempts to hold the innocent spouse liable for these attempts to thwart the system.
It is generally best to avoid the discrepancy in the first place. During a divorce, this means taking steps to better ensure the equitable division of property is completed using an accurate assessment of the couple's marital property. As a result, use of an experienced attorney can help reduce the risk of an audit after divorce.