Role of Court in Divorce and Federal Income Taxes

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Because Texas is a community property state, spouses are generally liability for the income taxes on one-half of all community income earned during the marriage.  In a divorce proceeding, however, Courts have limited authority over the obligations and responsibilities of the parties, as it relates to federal income taxes.

The Court can render orders as follows:

(1)       Requiring Preparation of Return: require the preparation and filing of federal income tax returns and define each of the spouse’s responsibilities for the preparation and filing of the return in the tax year in which the parties are divorced or for past tax years, in which the parties were married and did not file a return;

(2)       Requiring Cooperation in Preparation of Return: require both parties to cooperate with regard to producing documentation or other information necessary to complete the applicable tax return and can, if the court deems it necessary, order one or both of the parties to pay for the services of a tax professional to prepare the return.

(3)       Designation of Filing Status:  designating the parties’ filing status in the tax year in which they are divorced.   And, because under IRS rules spouses are considered “single” for the tax year in which they are divorced, a Court can decide to what degree spouses have to report their community income on their own individual tax return;

(4)       Dividing Refunds: the court can divide between the parties any refunds that have been received from any given year of the marriage.  A tax refund, like all other community property, is subject to the same discretionary principles for division and the court can apportion a tax refund in any manner that it deems “just and right” given the facts and circumstances then before the Court;

(5)       Dividing Tax Liabilities:  the court can divided tax liabilities, which have arisen during the marriage, between the parties.   Like the principles enumerated above with regard to refunds, tax liabilities are similarly subject to the same discretionary “just and right” principles upon division of property by the Court and can be apportioned by the Court accordingly, given the facts and circumstances at the time of Divorce.  As a result of this principle, the Court can also require a spouse to indemnify (repay or “hold harmless”) another spouse against any of the tax liabilities the court Ordered paid by the other spouse, but due to that spouse’s omissions or deficiency in the filing of that spouse’s income tax return the spouse not otherwise obligated to pay has become liable due to the principles of community property.   This creates a right for a legal cause of action to force repayment by the spouse incurring the liability who was not ordered to pay the same in the Decree of Divorce.

Keeping things Simple

Because most divorces do not involve complex tax scenarios or property divisions, the Courts often follow the “KISS” theory of keeping things simple – particularly where spouses have been separated for the entire calendar year of their divorce and have not “shared” or transferred income between themselves.  If this is the case and the parties have not filed a joint return during the year of their divorce, the Courts will typically render an Order simply requiring each spouse to report only his or her own income on their individual tax return.  Again, remember that the ultimate authority lies with the IRS on such matters.

Dependency Exemptions for Children

A court cannot, however, Order which spouse can claim the children as dependents on their tax return.  This is often misunderstood by parties to litigation in Divorce proceedings.  Rather, the parties can Agree to how they will claim their children as dependents in future tax years in the Decree as a form of a contract, but otherwise the IRS rules will control.  Under the Internal Revenue Code section 152(e), the dependency exemption belongs to the “custodial parent”, unless the custodial parent agrees otherwise and executes a release, known as form 8832, and can be filed for any year in which the non-custodial parent will have the right to claim the exemption deduction and can cover any specific year, specific set of multiple years, or all future years.

For parties who are in agreement on the terms of their divorce, this is an area that can provide a win for both parties where they are in agreement for joint custody and more than one child is involved.  By agreement, the parties can designate which parent will be the “custodial parent” with respect to a particular child and, this way, allow both parents to potentially qualify for “head of household” status which likely would offer both parties a more beneficial tax rate than filing as “single”.

Innocent Spouse Doctrine

In situations where you do not have confidence (i.e. do not trust) your spouse with regard to previously filed tax returns, you may be able to find some relief under the “innocent spouse” doctrine against any deficiencies or liabilities created by your spouse with regard to prior returns filed with the IRS.

Typically Federal Law Preempts State Law

Specifically in the context of the family code and the application of the Internal Revenue Code, is comment to find that federal income tax law controls and preempts the family code in Texas.  In a complex divorce case, your attorney will likely consult with a CPA who is an expert in these matters and will consult with you and your attorney on the most optimum way to divide assets and tax liabilities upon divorce.  This is an area ripe, particularly for the primary wage earner, to gain significant “hidden advantages upon divorce.

Divorce Court’s Orders Not Binding on IRS

As a result of the preemption concept, as you might imagine the Orders from the Court in your Divorce case are not binding on the IRS.  Under the federal rules and regulations, the IRS has the authority to make final determinations with regard to whether or not and to what degree former spouses are or are not required to report previously earned community income on their tax return in a year of divorce.

What to Do

If you are in the process of a divorce and have not filed your income tax return, you should first consult your attorney in this regard as it may require intervention by the Court.  If you and your spouse could get substantial savings from a joint return, but you are concerned about being saddled with the other spouse’s deficiency, you can and your spouse can file separate returns.  If you and your spouse later learn, after consultation with your attorney and a CPA, that that the other spouse’s return had no deficiencies then you and your spouse can file an amended joint return prior to the expiration of the statute of limitations — generally, three years from the date the original return was filed, or two years from the time the tax was paid, whichever is later.

However, be aware that cooperation with your spouse in this regard in the year of divorce is always best because if you don’t file a joint return, a number of complications may arise and, if there is no agreement between you and your spouse, the IRS, regardless of what the Courts say in a Divorce proceeding, may divide them based on relative tax liability which may be less advantageous to you or your spouse overall.

Speak to your Attorney and CPA

If you are in the process of a Divorce or believe that divorce may be imminent, do not make any quick decisions with regard to your income taxes as doing such could h ave a significant impact on your case and cause irreversible damage for you when appearing before the Court.

Making a decision For a more thorough discussion in this regard, you will need to speak with your attorney or consult a CPA.