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Divorce and taxes, part 1: an increase in tax audit chances?

One of the threads we touch upon from time to time in this blog is the tax implications of divorce.

In our January 21 post, for example, we noted that one of the commonly used tools for collecting child support is the placement of a lien on a tax refund of the party who owes the support.

We also noted, in our September 30 post last year, that claiming a child as a dependent for tax purposes can affect college financial-aid calculations.

In this two-part post, we will discuss the assertion – made yesterday in Forbes – that “divorce causes tax audits.”

To be sure, the assertion, when put so bluntly, is overly broad. After all, it isn’t as if divorce courts immediately inform the IRS when a married couple unties the knot.

That said, however, the IRS will have occasion to find out about your divorce in due course. As a married person, you were able to choose between a joint or separate filing. But when you file taxes after divorce, you will no longer be able to claim married status.

Of course, it is not as if the IRS immediately starts an audit as soon it learns of someone’s divorce. The process of identifying returns to be audited involves many factors and marital status is hardly at the top of the list.

But the reality is that when a divorce involves considerable contention about marital property division, it can make it more likely that disclosures about doubtful financial dealings come to light.

Sometimes this happens through forensic accounting, after one party suspects the other of hiding assets. In any case, if inconsistencies in a party’s financial declarations are exposed, the judge in the divorce case has a duty to report those inconsistencies to the IRS.

And a report like that can indeed lead to a tax audit.

In part two of this post, we will discuss the concept of innocent spouse relief in tax cases.

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