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Financial issues in divorce

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  • Financial issues in divorce

    I am close to two colleagues who are in the middle of a messy divorce from each other. The financial and emotional mismanagement that has taken place is astounding. But let me ask two questions of the group:

     

    1. In the process of seeking a legal separation agreement, the one who is less financially savvy and has had minimal dealings with their accountant (let's call this person A) has just discovered that they each claimed a 2016 retirement contribution of $53,000 which the spouse, B, was to have carried out but which was not made. B had access to both of their business accounts and would traditionally have made both contributions. Are there penalties for this beyond the tax due? Are they still eligible for an extension to pay by October, or must that be requested before the April tax day? Any other implications?

    2. A has just read the separation agreement drawn up by B's attorney. In it, A has learned that B's income, and consequently the proposed amount for child support, is not what was expected. While B had the larger income, their joint tax return attributed numerous business deductions to B in Schedule C, which in the opinion of A were joint expenses. For example, car expenses, entertainment, accounting fees, child care costs, and other expenses were all deducted from B's income rather than A's. It is possible that this was a discretionary decision on the part of their accountant; the reason is not yet clear. How are situations handled when one party disputes the way a joint tax return was prepared? Is there recourse? How much validity would a court (if it got to that point) give to such a return?

    Thank you in advance for any insight. Needless to say this has been disturbing on many levels to those around them.
    My Youtube channel: https://www.youtube.com/channel/UCFF...MwBiAAKd5N8qPg

  • #2

    1. Cannot extend after the due date has passed. Regardless, the $53k had to be deposited by 4/18 and there is no extension for that. They will need to amend their return, which opens up the opportunity to correct the issues found in #2.

    2. A-B's CPA needs to sit down with both of them before amending. I have a strong suspicion that the CPA will disengage from one or both of them going forward. In fact, it is a potential conflict of interest to represent both spouses if they cannot agree. A should not sign the return until they both agree that the expenses are split fairly. (btw, the child care costs are not deductible on schedule C).


    Unfortunately, the IRS does not allow for taxpayers to amend to MFS once a MFJ return is signed and filed, so they are stuck with MFJ for 2016 and will have to agree on a CPA, either the current one or a new one. I wouldn't necessarily attibute fault to B or the CPA before finding out who authorized the expense split. Lucky the $53k was not deposited, in a way, because, otherwise, A has signed the return (or the efile form) attesting that the information on the return is accurate.

    Interesting situation and a very strong endorsement for both spouses taking an interest in family finances. It sounds as if A paid no attention to the tax return and let B handle all on B's own, which is actually not so unusual. I hope there are no minor children involved.
    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Sorry you're involved in things like this as both close to you. They probably look to you as the money guru too in general.

      Best advice from you is to have them seek professional divorce advice. I'm sure any experienced divorce lawyer has seen this more than once.

      That said, it's pretty easy to reassign child care as a shared cost. A tax document holds water to the IRS, but doubt that we do much in divorce...In fact may show poor reflection on partner B by trying to mess with partner on shared expenses. Lawyer A can use the tax returns as evidence that B cannot be trusted. But I think it's really a tax deduction from higher income to max benefit from the CPA side....And simply carrying that forward in accounting on the CPA side. If I were partner B, would think twice on how good lawyer B is if didn't review that settlement proposal. Who doesn't share child care expenses in reality?

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      • #4
        Thank you both; that is very helpful. Unfortunately, there are some very young children involved, which is tragic for them.

        i agree, no assigning fault over the return at this point. These may have been discretionary choices made for reasons by the CPA, or at least bear explanation first. But the opportunity to amend at least gives A the opportunity to feel further decisions can be made based on the "right" numbers.

        it certainly points out some of the pitfalls of relying exclusively on one's spouse for financial literacy and decision-making. And brings home a point many never think about: check your return if prepared for you, because your signature is an endorsement of its contents.
        My Youtube channel: https://www.youtube.com/channel/UCFF...MwBiAAKd5N8qPg

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        • #5
          Generally who-gets-to-claim-what is decided in the property settlement.

          And yes, as star trek doc said, it is a question for their divorce attorneys.

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          • #6




            Who doesn’t share child care expenses in reality?
            Click to expand...


            Some people get very specific in their marital agreements or separate property agreements.

            And then of course in divorce these expenses can come from two different sources.

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