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Orange County Divorce and Taxes

With tax time fast approaching this is a good moment to examine some of the ways in which an Orange County divorce can affect one’s tax status. A fascinating article posted yesterday on the financial website Smartmoney.com examines the consequences of an obscure IRS provision known as the “Innocent Spouse Rule,” touching on its particular role in divorce cases.

Briefly stated, the innocent spouse rule allows one spouse to avoid tax penalties related to a joint return if he or she can plausibly claim to have had no knowledge of what the other was doing in filling it out. As the article at Smartmoney.com makes clear, the term “spouse” can be slightly misleading, since the rule can also apply to divorced couples. That, of course, is good news. One of the sad realities of divorce, be it in Orange county, Los Angeles, San Bernardino or elsewhere, is that dissolving a couple’s financial links can sometimes be a more complex process than dissolving the marriage itself.

Smartmoney, for example, cites a case from the 90s in which a woman “was denied an appeal after the IRS wouldn’t let her claim the innocent spouse rule over a return prepared by her ex-husband.” The point here being that tax obligations incurred during the marriage followed the woman even after her divorce. Smartmoney notes that the law was changed in 2004 to make innocent spouse claims easier to file. That, however, has led to a huge spike in the number of claims made under the law and has led the government, in turn, to view such claims with increasing skepticism.

On another key divorce-related tax issue, the IRS’ innocent spouse rule Q&A page notes in several places that anyone whose name is on a joint tax return is responsible for the tax, interest and penalties related to that return – a fact which does not change “even if a divorce decree states that a former spouse will be responsible for any amounts due.” In other words: your settlement may say your ex is responsible for the tax penalty, but, as far as the IRS is concerned, that is none of their concern; until someone pays the money you are both liable for it.

Issues such as these illustrate the important role an Orange County divorce lawyer plays throughout the process of dissolving a marriage and dividing up a couple’s property. Without careful, detail-oriented legal advice a break-up can prove to have unanticipated, and far-reaching, consequences. An experienced California family law attorney can help clients avoid these pitfalls.

Smartmoney.com: More spouses off the hook for tax mess

IRS Innocent Spouse Questions & Answers Information Page

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