With tax season upon us, I thought this recent article by Peter Reilly on Forbes.com might be of interest to readers of this blog.
Post-Divorce Tax Intimacy Can Be Riskier Than Post-Divorce Sex
Post-divorce intimacy between exes seems to be something of a controversial topic among therapists and the like. In Psychology Today, Pamela Cytrynbaum wrote about the various forms that post-marital sex can take, finishing with the caution:
No matter how, why, when and where you’re doing it with your ex, my advice: Keep your eyes wide open.
Post-divorce sex between exes has an interesting titillating aura about it, but there is a bit of financial intimacy that is more or less taken for granted.That would be a joint tax return for the final year of the marriage. It might even be arranged, even prepared, by the half of the couple that had always tended to it. I would suggest that, in many circumstances this might be an even worse idea than a post-marital roll in the hay.
Tax Court decisions to illustrate the hazards of post-marital tax entanglement are numerous, but the most recent is something of a standout. I should mention at the outset that the Tax Court believed the version of events laid out by Anthony W. Roberts. His ex-spouse had a different version, which the Tax Court did not believe. I’m just a tax blogger, not an investigative reporter, so I am telling you the story as the Tax Court told it without any independent verification.
Mr. Roberts married Cristie Smith in 1990. They separated for a period in 2008, permanently separated in January 2009 and were divorced in March 2010. They maintained two checking accounts, one with Washington Mutual (WM) and the other with Harrborstone Federal Credit Union (HS) . Although both accounts were joint, they operated them on a his and hers basis, with Mr. Roberts doing everything through the HS account and Ms. Smith doing everything through the WM account. Mr. Roberts never saw the WM statements. Mr. Roberts gave his tax information to Ms. Smith in early 2009, expecting that she would file a joint return as had been their custom.
As it turned out, Ms. Smith did not file a joint return with Mr. Roberts. She did her own return, apparently accurately, married filing separately. She filed Mr. Roberts as single lowered his wage income by $3,000, increased his withholding by $3,000 and had the resulting $3,357 refund electronically deposited in the WM account (i.e. “her account”).
There was something even more significant that Ms. Smith left off Mr. Roberts return, something that she had not informed him about. In late 2008, she had arranged to have ING issue to checks totaling $37,020 which she deposited into the WM account. ING issued the accounts from Mr. Roberts IRA. According to the Tax Court findings, Ms. Smith used the funds to set up her post-separation household, take a vacation and family trip and pay expenses for which she was liable.
What A Mess
When Mr. Roberts received a 1099-R from ING, he thought at first that he was a theft victim. Eventually he found out what happened. The IRA money that Ms. Smith had availed herself us was taken into account in the final divorce property settlement in 2010.
The IRS position was that ING made checks out to Mr. Roberts and they were deposited into a joint account. He picks up $37,020 in 2008. End of story. The Service noted that taxpayers in similar circumstances were allowed to replenish IRA funds that had been diverted citing Private Letter Ruling 20119040. Mr. Roberts had not done that. The Service noted that Mr. Roberts ended up getting credit for the IRA distribution in the final settlement.
Mr. Roberts Mostly Wins Kind Of Sort Of Probably
Since Mr. Roberts did not disclaim the return that Ms. Smith filed for him nor file one of his own, he was stuck with the deficiency from the W-2 and filing status misstatement and any resulting penalty. The Tax Court did not find it reasonable of him to rely on Ms. Smith. Yah think?
The IRA distribution was a different story. The theories that the IRS put forth were arguments that support him being taxable on the distribution in 2009 or 2010. There was no reasonable basis for taxing him in 2008. That puts a bit of a cloud over Mr. Roberts victory parade, since, counting on my fingers, I come up with 2010 still being an open year. I’m betting the Service does not go after him for 2010. If they did and he won, they may have created a roadmap for conspiratorial divorcing couples to bail money out of IRAs tax-free. Frankly, I would caution you to not try this at home or at all.
When you get divorced, you need to accept that bad as the relationship may have been, there were probably many of your needs that were being met through it. Likewise, low as their opinion may have become of you, you were probably meeting some of your spouse’s needs. There may be some things that you cannot disentangle, but you probably should disentangle as many as you can. That’s the point of getting divorced. Tax compliance is one that is relatively easy to disentangle and it can cause you a lot of trouble if you don’t.
If you have always hired somebody to do your return, one of you should probably hire somebody else. My experience is that many preparers don’t think of couples as two clients. Also, many preparers are not sensitive to the implications of joint and several liability and encourage joint filing when it is inappropriate. Divorce attorneys and even probate judges seem to make the same mistake sometimes ordering recalcitrant spouses to sign joint returns.
As far as having your ex prepare your return or preparing your ex’s return, it seems like a really bad idea, although the only instance of it I know of seems to be working out OK. My covivant is such a good preparer and already does so many other free returns, that I persuaded her to do my return the last two years rather than have to learn new software myself. So for 2012, there is a Drake software account with nine returns – Me. CV, her five adult children, her ex-husband and her ex-brother-in-law. I guess there is an exception to every rule.
Information provided by K.O. Herston: Knoxville, Tennessee Divorce, Matrimonial and Family Law Attorney.