need some advise on a divorcing couple

[schirallicpa]

These 2 have had me file their taxes for the last couple of years. Now they are in the midst of bitter divorce. He's the main wage earner and has the withholdings. She is a hairdresser and probably hides half of her income.

They cannot agree on anything. I told them to suck it up and file joint and split the refund and be done with it. That is not going to happen.

She wants to file joint in order to avoid paying tax on her income. He wants for file separate so she has to pay tax on the income.

I'm stuck in the middle.

Has anyone ever attempted to get a signed agreement with such couples?

[Guest Taxed]

Yes I have and I think I posted here before. This is my SOP

1) Tell them you will need to get their attorney's involved. If they refuse, get out of this mess. You need to CYA.

2) Get them to draft the agreement and have it signed that they are going MFJ or MFS. Also they should waive any conflict of interest.

I have had to do this 2 times that I can remember, and both times when I told them they can go HRB, they agreed.

One time I actually had to ask a couple to leave my office and go to the street because they started swearing at each other in front of me.

[mcb39]

Getting the attorneys involved is the worst idea in my experience. Very often, attorneys know little or nothing about tax law. (Of course, there are many exceptions.) Generally divorce attorneys ask me for advice. I had one last year where the court order stated that they split income for 11 months (divorced on November 29) and claim own income for one month. They couldn't even agree on that. I told them to each claim their own income, file single and let it wash out that way. He agreed; she adamantly declined. Now, it has come back to bite them both because the IRS is just not GETTING IT! Paperwork has been returned numerous times, including again just this week. I have not found a single agent on the Federal level who understands about splitting income. On the other hand, we have had no issues with the State because WI is community property and they know all about splitting income.

My advice is if they are divorced at the end of the year, have them each filed single and claim their own income. If they cannot agree; send them down the road or keep the one who is willing to follow your advice. After the year of the divorce, you are most likely going to have to fire one of them anyhow.

[Guest Taxed]

>>> Getting the attorneys involved is the worst idea in my experience. Very often, attorneys know little or nothing about tax law. (Of course, there are many exceptions.)

If you are approached before the damage is done, it presents an unique opportunity to build a referral source with attorneys that need another professional to bounce ideas.

I routinely get referrals from 2 attorneys in town who started bouncing ideas since they graduated law school. And if one of my clients needs a referral to an attorney I got one.

The key to avoid the mess is to get involved early. In my annual questionnaire I have a section family status change and I talk about these issues.

[jainen]

>>they should waive any conflict of interest.<<

I disagree. It would be impossible to pull this off, because in order to obtain an informed waiver you would have to advise the clients of possible adverse consequences. There is simply no way for you to know what could come up in this hostile divorce! The CPA apparently has reason to believe one party is lying about income--how can you be fair to the other party if that turns out to be true? It can have major non-tax consequences such as family support and property division.

In my opinion, the advice given to the clients in the original post was improper. Pick one side; don't get in the middle.

[MsTabbyKats]

I believe that if people are divorcing, the accountant can only do one MFS...because of a conflict of interest.

Since they won't file jointly...tell them you can only do one of their returns.

As others have said, don't get in the middle....or you'll end up being a marriage counselor.

If I had to choose, I'd pick the one that I communicate with the most.

You can refer the second one to another preparer.

[Guest Taxed]

The 2 couples that I had signed conflict of interest waiver drafted by their attorney, I kept 3 of them till today. The one I lost moved to another state after divorce. I am also doing the returns of 2 children of one couple who were referred to me by their parents after the divorce.

I completely agree we should not get in the middle of their fight, but I am not going kick them to the curb either if they follow a reasonable suggestion.

[mcb39]

Divorces are not all bitter and often the couples can both be retained, particularly if there are small children involved and it is a matter of who gets to deduct who. Nobody said anyone should get kicked to the curb, but I see no value in a conflict of interest waiver. It has no valid merit. At any given time they can agree to disagree and they could care less where that leaves you.

However, it is seldom a good idea to retain both parties in a divorce as clients beyond the year of the divorce (unless you like having headaches and upset stomachs) This is my opinion based on experience.

[Guest Taxed]

>>>> but I see no value in a conflict of interest waiver. It has no valid merit. At any given time they can agree to disagree and they could care less where that leaves you.

Perhaps you misunderstood what I meant by conflict of interest waiver. This is a waiver where the two parties after consulting their respective attorney are agreeing to have me prepare their return (MFJ or MFS).

I actually have had more issues with who claims which dependent with unmarried couple HH situations than divorcing/divorced couples. Generally their divorce decree will spell it out and most stick to it.

[jainen]

>>they could care less where that leaves you.<<

Unfortunately, Marilyn, their attorneys could care. To use your example of small children, we often see that custody orders do not follow federal tax law. Your involvement could easily affect the outcome, so one party could easily claim that it benefited the other in violation of your fiduciary obligations. An informed waiver would be good protection, though not as good as only having one client.

[MsTabbyKats]

This is not my experience, but a CPA referred one party of a divorcing couple to me because she said Circular 230 prohibited her from doing both. Again...I am not claiming to know this officially....just my friends reason for "outsourcing".

On the other hand, I did both parties of a very friendly divorce....but MFS was not involved.

[Gail in Virginia]

Quite often in a divorce situation what is good for one client is not good for the other. For example, if they separated more than six months prior to the end of the year and have a child, it might benefit the spouse who can to file as HoH, but leave the other spouse filing MFS which is usually not to his/her benefit. Even if they both file MFS, if one can itemize and the other cannot, then one benefits at the expense of the other. Even on a joint return, it might be that one spouse would be better off filing HoH (if eligible) and getting EITC, even though together they are better off MFJ. And these are just obvious conflicts of interest in the advice that you give - potentially there are lots more ways that one spouse benefits at the expense of the other. How do you determine which spouse to benefit if you are representing both? I suspect that is why the CPA preferred to refer one party to another preparer to avoid even the appearance of a conflict.

[Guest Taxed]

>>> Quite often in a divorce situation what is good for one client is not good for the other.

Good point. And that is the reason I want their respective attorney's involved. I run MFJ/MFS report and in my correspondences both lawyers are copied. I want them to draft the waiver of conflict of interest.

My job is to lay out the tax law as best as I can given the facts that are disclosed to me by the parties and their attorneys.

I do not choose sides, though some have tried to pull in that direction.

[jainen]

>>Circular 230 prohibited her from doing both<<

That is correct. Section 10.29 requires "informed consent" in writing. With the limited knowledge a tax preparer usually has about a client's circumstances, especially non-financial issues, it's pretty hard to adequately inform the client of potential risks. Missing something could have enormous consequences to the client, and to yourself because it's an ethical violation. Referring to a lawyer is good, but if you have already "run MFJ/MFS report" then you have already transmitted information that may have an adverse effect. Maybe one spouse doesn't want the other to know about that big investment account, or what the W-2 really shows, or details about those business trips. Maybe they don't even want the other to know that they don't want the other to know. Maybe that's the whole point of the divorce!

[Guest Taxed]

>>> or details about those business trips.

For one of my divorcing couples that was precisely the reason according to the ex-wife. Her husband had a Girlfriend/Secretary that went to most of his business trips. He was a Vice President of a fortune 500 company.

[SaraEA]

"I told them to suck it up and file joint and split the refund and be done with it." Um, marital status is determined on the last day of the year. If on Dec 31 they were divorced, they CANNOT file jointly. I actually had a couple this year whose divorce decree said they were to file jointly the year of the divorce, but that is against what the IRS says they must do. No wonder the Supreme Court is reluctant to take on tax cases. Judges don't understand the law any better than laypeople.

The "income splitting" part is different and I could see how it could confuse the IRS computers that match reporting documents filed under one SS# with the tax return of the person who has that SS#.

[jklcpa]

The way schrallicpa presented the information, I assumed that the couple was still married at the end of the tax year, that the divorce either hasn't been finalized or was finalized in 2013.

For those few here that think you can represent both sides fairly, let's take an example of a very simple hypothetical return for a divorcing couple, John & Jane, where each party has one W-2, no children, and using the standard deduction. My state is not a community property state. It's easy enough to calculate the MFJ return and the two MFS returns. Let's further assume that all three returns would show refunds, but that the MFJ results in the lower overall tax and larger refund when compared to the two MFS returns. The couple is amicable to working out their divorce and settlement, and they both agree to file that MFJ return to receive the larger refund. They want the answer from you as their tax preparer on how they will split that refund? What basis will you use? You come up with what you think is a reasonable basis, and then Jane says that as in past years, they arranged to have extra withholding from John's pay because they like the return to show a refund. Can you be fair to both? What is your basis for splitting the refund?

[Guest Taxed]

>>> Can you be fair to both? What is your basis for splitting the refund?

90% of the time my divorcing clients will choose MFJ to get the higher refund and some will ask me that question. How should we split the refund?

My answer. I can't tell you how you did your finances but probably like how you split your household income/expenses etc. You guys come up with any reasonable way to split it because it belongs to both of you. How did you do it last year?

I am not getting in the middle of telling them the amount or percentage. Never had any divorcing couple insist that I tell them exactly how to split the refund.

[jainen]

>>What is your basis for splitting the refund?<<

There are several formulas available, and it certainly isn't limited to refunds. it is actually a three-step process. First allocate the income and deductions. Then determine how much of the total tax liability to allocate to each spouse. Then allocate the withholding and estimated payments to see if one spouse already paid too much. You'll have to decide where to put various credits. Keep in mind that clients can agree to one of these splits regardless of how they actually file. They may want a lower overall tax, or they may want to avoid joint liability.

Don't try any of these without an informed waiver of conflict of interest, in writing. If you run into trouble, you might be able to get back on track by talking about the two bank accounts for direct deposit.

One of the best ways is 50/50. It is simple to do and easy to understand. I justify it on religious terms, community property, low cost, running out of time, postponing hard choices, lawyer's instructions, de minimus effect, or whatever fits the situation.

Form 8958 is an official IRS calculation, so it has the feeling of objectivity. It is designed for community property but can be used as a worksheet in any state. It recognizes that some things in a marriage are joint while some things remain separate. The allocation can be made according to law or agreement. The brief instructions are helpful. Formal isn't necessarily better, so variations are to use your own Excel worksheet or just pencil and paper. Usually I will do a quick pencil draft and quote a fee for a more detailed analysis.

Here's a model I've used once or twice but don't like. If one party refuses to share I will draft either an S or an MFS return using just those items. The idea is, "You have to file anyway, so how much extra did my information add?" Or maybe, "I won't pay more than if I were single." This can be very misleading sometimes. I mark the printout draft and planning-only, because it does not follow tax law and can't be used for filing. Nevertheless I charge full price for it. .

A variation of that is what I call tax effect. Some items are inherently unequal, such as capital gains with a lower rate, claiming kids for EIC and Head of Household, and high income subject to phaseout or AMT. You can use a special allocation to compensate for this. It sounds harder than it is, and I generally just do a partial for the item in question. I only do it on instructions from one or both attorneys, and I don't bother billing because they won't pay anyway.

[jklcpa]

Yes, Jainen, and thank you. I wasn't looking for the specific advice but only to make the point that even with the simplest of returns there can be difficulties keeping both of them happy, as happy as a divorcing couple can be when discussing finances.

"I won't pay more than if I were single." and ...tax effect. Some items are inherently unequal....

Yes, I have a variation of this each year with one older couple. They aren't divorcing, it's that they decided to get married about 5 years ago after having lived together for more than 30 years. He's been my client for 17 years and I'd never met his wife. She will most likely never get over that filing a joint return causes 85% of her social security benefits to be taxable because only about 25% was taxable on her single returns, and she used to use the standard deduction (higher because she's over 65), and always received a refund. They itemize with most of the deductions coming from the husband and the joint returns usually show a refund where a MFS return would have her owing. They both make my job easy by asking what her refund would be if she could file single, he pays her off something much higher than that, and they both go away happy. It works for them.

[kcjenkins]

What it boils down too is that often tax returns, to the clients, are more than just tax returns, they are battlegrounds for "fairness", or "equality" or even a chance for "one-upmanship". That's true even for married couples, divorce just brings it out more into the open.You all know the spouse who makes almost as much, but has their withholding way lower than it should be, so that 'take-home pay' is equal, or higher, for just one example.

I might throw out a suggestion or two, for what the possible options are, but I never, ever, ever, tell them "what it should be". Let them, and/or their lawyers, fight that one out.

[Guest Taxed]

How many of you do a review of witholdings each year as part of your tax preparation service?

[kcjenkins]

Only when there was an 'issue' of it being either too high or too low.

[Guest Taxed]

I am amazed how many taxpayers have over witholding just to be happy to get a big refund!

I understand some people use the US Treasury as their piggy bank. But if you have a savings account you can do the same thing, unless you just can't hold on to your own money?

For a divorcing couple if you have a balance due using MFJ, it may give a small refund to one with MFS. See the fireworks then?

[MsTabbyKats]

I've had many "happily married" couples wanting to know how much is each ones claim to the refund or payment due.

When you factor in the state, this is quite a task.

The only "advice" I give is to tell them which one is having too much/too little withheld. As far as "splitting the refund", this is not my problem.

As far as Taxed's comment about too much withholding in lieu of a bank account:

I do tell them that they are giving the govt an interest free loan...but nowadays they aren't getting interest anyway at the bank. If it happens again...I don't comment.

Just getting that big check makes some people happy...that they will have a lot of $$$ for something instead of drips and drabs that they will spend.

Everyone has their own philosophy....

However, this is actually good for us....because they think we are so smart to get them huge refunds.