by Ron J. Anfuso, CPA, ABV, CFF, CDFA, FABFA
Ron’s Corner:
There are actually missing components in the divorce process. These are services that can increase a client’s level of satisfaction with his or her family law attorney. To have a clear picture of one’s own tax outlook for the next few years and financial outlook five, 10, or even 20 years down the road can serve as a blessing to the client. This can provide increased hope for the future as the emotional pain and frustration of going through the divorce process comes to a close.
As a CPA, I am qualified to deliver tax planning services. Tax planning encompasses understanding what the client’s liability could be and how to minimize the liability, which could mean organizing the client’s finances or making changes to take advantage of deductions and credits. This service is especially important for business owners. Due to frequent changes in tax laws, I update plans annually when needed.
My expertise and experience includes being credentialed as a Certified Divorce Financial Analyst® (CDFA). (See: https://anfusocpa.com/wp-content/uploads/newsletters/newsletters3.pdf). As a forensic accountant trained as a CDFA, I recognize the advantages of working with other Certified Financial Planners® (CFP). I currently work with two qualified financial planners.
Part of a forensic accountant’s job is to make certain the division of property is equitable at the time of divorce. On the other hand, a financial planner or a CDFA has the ability to study every property division scenario on behalf of a client to determine what the financial outlook for the individual would look like many years into the future when comparing alternatives to each other.
The dilemma for the family law attorney is that numerous clients see this as the attorney’s responsibility to not just select a property division scenario that looks equitable at the time of divorce but to project for the client what his or her financial situation will look like years later. The fact that this is not part of the attorney’s function does not necessarily erase any client dissatisfaction should the client have doubts about which scenario the attorney should attempt to settle the case. The attorney can not only refer any potential dissatisfaction to the CDFA/CFP concerning property division but can enhance the client’s satisfaction with the attorney by making a referral to a professional who can provide valuable guidance concerning vital decisions.
If you have questions concerning tax and/or financial planning for a client, I welcome you to contact me.
Ron
A common issue arises when a taxpayer separates in one year but still has to file a return with their ex-spouse for the prior year when they were still together or when the community ended mid-year. (See https://anfusocpa.com/glossary-accounting-terms/).
Frequently, the ex-spouse does not want to provide any information about earnings or wages. In some divorces, there can be a long period after the couple is separated before the assets are split. Keep in mind that community assets will continue to generate community income during this period.
Generally, difficulty in acquiring accounting or tax records is not reasonable cause for failing to file a return or report income on a return. However, IRC §66(b) provides an exception to the general rule that community income is taxed one-half to each spouse. IRC §66(b) authorizes the IRS to disregard community property laws by denying the benefits of income splitting between the spouses if one spouse acted as if they were solely entitled to certain income and failed to share information about that income with the other spouse before the due date of the tax return. Only the IRS can invoke IRC §66(b). It is not a relief provision that can be invoked by a taxpayer to escape tax liability. (See https://freemanlaw.com/innocent-spouse-relief-3/)
Treasury regulation §1.66(2)(b) states that community income may be treated as separate property income if all the following conditions are met:
1. The spouses are married to each other at any time during the calendar year.
2. The spouses live apart at all times during the calendar year.
3. The spouses do not file a joint return with each other for the year.
4. Beginning or ending in the calendar year, one or both spouses have earned income, which is community income for the calendar year.
5. No portion of the earned income is transferred directly or indirectly between the spouses before the close of the calendar year.
You aren’t responsible for the tax relating to an omitted item of community income if all of the following conditions are met:
1. You didn’t file a joint return for the tax year.
2. You didn’t include the item of community income.
3. The item of community income you didn’t include in your gross income is one of the following:
A. Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee.
B. Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor.
C. Your spouse’s (or former spouse’s) distributive share of partnership income.
D. Income from your spouse’s (or former spouse’s) separate property (other than income described in (a), (b), or (c)). Use the appropriate community property law to determine what is separate property.
E. Any other income that belongs to your spouse (or former spouse) under community property law.
The taxpayer also has to establish that they didn’t know of (and had no reason to know of) the community income, and that, under all facts and circumstances, it wouldn’t be fair to include the item of community income in the gross income.
Many taxpayers who are separated from their spouses may not be able to establish that they didn’t know of (and had no reason to know of) the community income, especially if their current or former spouse has continued working in the same job or continues to hold the same business or investment property held in prior years. If this happens, we recommend that the taxpayer file a return and either omit the ex-spouse’s income or make their best estimate of their share of the community income and attach a statement to the return explaining the situation.
It’s also important to determine when the community ends in divorce scenarios. In California, only income from the period prior to the date of separation is reported as community income. Frequently, the community income ended before the end of the year in the year of separation. If the community ended, the taxpayer is not responsible for reporting their spouse’s income on their separate return for the period commencing with the date the community ended.
If you have any questions, feel free to contact me.
