DIVORCE

WHEN IS A TAX LAWYER NEEDED IN A DIVORCE CASE?

Family lawyers know to engage a forensic accountant in all but the simplest cases. In addition to normal divorce related tasks like investigating finances, the accountant will sometimes be asked to perform tax services. There are occasions, however, when the client would be better served by involving a tax lawyer. Some of these are:

 When income tax returns have not been filed: The knee-jerk reaction of most CPAs to file immediately is a trap for the unwary. The failure to timely file tax returns can be a civil tax or criminal tax matter. If it is a criminal act, filing the tax return later does not erase the crime. There is no red-line separating neglect from willful conduct. Only a tax lawyer can investigate and advise someone about the consequences of filing delinquent returns. An accounting trial-expert cannot be clothed in the attorney client privilege.

 When prior filed returns contain serious errors or omissions: The considerations are similar to ...

MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007 PRESENTS DIVORCE TAX ISSUES

Effects of the sub-prime mortgage debacle are certain to be felt in divorce proceedings. Moreover, relief granted by Congress to distressed homeowners will present additional tax issues of which divorce lawyers should be aware.

The Mortgage Forgiveness Debt Relief Act of 2007 (Act) provides tax relief to defaulting homeowners who might otherwise owe income tax on the forgiven portion of their mortgage obligation. A lender that is paid less than the full principal owed on the mortgage often decides not to personally pursue the borrower for the deficiency. In that case the lender files Form 1099-C informing IRS and the borrower of the forgiven portion of the debt that is to be treated as income.

The Act makes nontaxable debt forgiven on a qualified principal residence (QPR) with certain limitations as follows:

1. The relief applies to debt forgiven between January 1, 2007 and December 31, 2009.

2. Qualified principal residence is a residence as to each taxpayer meeting the s...

SOME SITUATIONS MAY REQUIRE A TAX LAWYER TO INTERPRET

1. There is accrued interest on the loan, especially on a home equity loan, that was not used to improve the residence (a cash-out).

2. There is a foreclosure sale of short sale with expenses incurred in connection with the transaction that may or may not be added to the loan balance or sales proceeds allocated to late fees or interest.

3. The home has been both a principal residence and vacation home.

4. One spouse has left the home.

5. A spouse is insolvent immediately after the forgiveness of non-qualifying debt.

6. There is home equity debt and total debt exceeds the fair market value of the home.

7. The home is sold at a gain following debt forgiveness.

8. The home is sold at a loss following debt forgiveness in the same year.

9. The lender participates in the sale of a home at a gain.

10. A single umbrella debt encumbers two residences in which the spouses reside separately.

11. The spouses are to file MFS returns following a forgiveness or fo...

IRS CAN COLLECT TAX FROM PROCEEDS OF SALE BY WIFE OF PROPERTY FOR HUSBAND’S SEPARATE RETURN TAX DEBT – TAX LIEN AS TO HUSBAND ATTACHED TO TENANTS BY ENTIRETIES PROPERTY TRANSFERRED TO WIFE BY QUITCLAIM DEED

It was pretty well accepted by family lawyers that a safe harbor for income taxes of a divorcing spouse was to elect the status of a married person filing separately. In that case it was thought the electing spouse was freed from tax liabilities arising from the improprieties of the other spouse without having to resort to the shaky, factual laden, desperation defenses of innocence found in IRC Section 6015. If in doubt file a separate return, went the advice. You’ll have no problems with the tax man. Well, as it turns out that is not quite as true because of United States v. Craft, 535 U.S. 274 (2002).

Don Craft didn’t file any income tax returns for the years 1979 through 1986. In 1988 the IRS assessed $482,486 in unpaid income taxes against Mr. Craft. When he failed to pay, pursuant to IRC Section 6321, the federal tax lien attached to “all property and rights to property, whether real or personal, belonging to him.” This lien attaches automatically and does not have to be ...

A FAMILY LAWYER COULD BE CONSIDERED BY IRS TO HAVE BECOME A TAX RETURN PREPARER

Consider that you have prepared a MSA that includes payments from husband to wife that are to be reduced when one of the minor children attains majority. The MSA does not state that any part of the payment shall be non-taxable to the wife and non-deductible to the husband. The client calls you one April afternoon and asks if under the MSA you drafted for him, he may deduct the all of the payments he has made to the wife in the previous year. You tell him – yes – since the agreement did not expressly make the payments non-taxable or non-deductible. The client deducts all of the payments, is audited and the amount of alimony reduction keyed to the child reaching majority is disallowed as being disguised child support. The client tells the agent that “my divorce lawyer advised me that I could deduct all of the payments.”

Surprise, surprise, surprise! Under amended Section 6694 of the Internal Revenue Code, you literally could be considered a tax return preparer if the amount o...