Tax audits arising from marital property division or valuations

Readers of this law blog know that divorce changes an individual’s tax filing status. Generally, that post-divorce status might be indicated as single or head of household.

However, readers may not be aware of some of the problems that can arise after divorce, but pertaining to past jointly filed tax returns. In a worst-case scenario, a tax audit from the Internal Revenue Service might force former spouses to relive some of the more unpleasant aspects of their divorce.

Since the IRS often schedules audits for several months, the experience might seem prolonged. Applicable statutes of limitation also allow IRS officials to audit the assets of the former marital estate for even longer. After a divorce, that period is generally three years for an audit of the former couple’s finances. However, if the alleged inconsistency is over 25 percent, that limitations period might be extended to six years.

A divorce attorney might be able to help avoid this outcome. By working with forensic accountants and other experts to prepare an accurate valuation of the marital property, an attorney might be able to discover discrepancies. At a minimum, an inventory of the assets of the marital estate will help couples organize their finances. That organization could help expedite any subsequent questions posed by an auditing IRS official.

For example, in valuing a couple’s home and examining the terms of the mortgage, a divorce attorney might discover accrued property taxes or other liens on the house. An attorney might also have suggestions for a refinance or modification of the mortgage, in the event that one spouse will be taking sole ownership of the house after the divorce.

Source: Forbes, "Divorce Causes Tax Audits," Cameron Keng, Feb. 10, 2014