Patrick Michael Posted December 6, 2013 Report Share Posted December 6, 2013 Client and her husband took out a car loan as co-signers. They were divorced the next year and the divorce papers stated the husband was responsible for making the payments on the loan. Yesterday the wife received a letter from the IRS that she failed to report $9,000 in income for cancelled debt on the car loan. She can't locate her ex-husband to find out what happened. Obviously, she does not want to pay the tax for her deadbeat ex-husband but I cannot think of any way to get her out of having to pay it. The attorney that handled the divorce never thought of having her name removed from the loan and she was not insolvent at the time of the cancelation. Has anyone else run into this situation? Any ideas? Thanks. Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted December 6, 2013 Report Share Posted December 6, 2013 Perhaps a copy of the divorce papers may help......but I think the lawyer may have some responsibility. It looks like he screwed up. Quote Link to comment Share on other sites More sharing options...
Guest Taxed Posted December 6, 2013 Report Share Posted December 6, 2013 The joy of filing as MFJ! She does not have a prayer! Quote Link to comment Share on other sites More sharing options...
mcb39 Posted December 6, 2013 Report Share Posted December 6, 2013 Correct. I just had a client who got tapped for 2009 income from EXXON that her x-husband did not report. They divorced in 2010 and 2009 was the last year they filed MFJ. Since they can't find him and she is a solid citizen with a good job; she gets to pay. This was restitution income from the Alaskan oil spill which happened long before she met him. Didn't matter. MFJ rules Quote Link to comment Share on other sites More sharing options...
michaelmars Posted December 6, 2013 Report Share Posted December 6, 2013 innocent spouse! Quote Link to comment Share on other sites More sharing options...
JohnH Posted December 6, 2013 Report Share Posted December 6, 2013 Since this is a 1099-C, I think she would get a notice even if she filed MFS or single in the year it is issued. Doesn't the 1099-C tie to the social security number rather than to the tax return? I'd bet both she and the ex are getting the same notice. Quote Link to comment Share on other sites More sharing options...
Mr. Pencil Posted December 6, 2013 Report Share Posted December 6, 2013 Obviously, she does not want to pay the tax That shouldn't be so obvious. Paying the tax is the simplest solution, so it should be considered a viable option. There are other options, but they may incur accounting or legal fees with no promise of success. Sometimes it is best just to move on. From your position as a professional, don't be too quick to believe her one-sided story. Finance companies don't write off debts without trying to collect them first, so how did this happen? Did they repossess the car? Do you have an opportunity to serve her further, by advising her attorney on tax implications of seeking an amended order in family court? 1 Quote Link to comment Share on other sites More sharing options...
mcb39 Posted December 6, 2013 Report Share Posted December 6, 2013 innocent spouse!Didn't hold any water. He never reported the income on the return. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted December 6, 2013 Report Share Posted December 6, 2013 I HAVE had S corps that were in the wife's name 100% but totally controlled by husband cleared from the wifes tax account because we showed the address and bank accounts were all to the ex's address. Innocent spouse is pretty liberal at times. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted December 6, 2013 Report Share Posted December 6, 2013 Patrick, Janine's advice is very sound,, and should at least be seriously considered. While no one likes to pay a tax they see as unfair, and naturally she sees this as unfair, but still, you have a responsibility to your client to inform sher of the cost of fighting it vs the extra tax. And the chance that even if you do fight it, she loses. If your services fighting it are free, the interest running on it during the fight would still need to be considered. Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted December 6, 2013 Report Share Posted December 6, 2013 I don't see this as much of a fight. I'd call "whatever number" at IRS....and explain about "the divorce agreement". Also...whose SS# is first on the loan? The worst thing that could happen is the IRS agent laughs. The agent could also say..."Send in the divorce papers and a letter etc." I'd also keep the attorney informed about this.......and since it's his fault (assuming the facts are correct).....I would discuss his liability. Maybe he has insurance. If the divorce papers say it isn't her responsibility....it isn't her responsibility. And she shouldn't be paying the tax. She could also take her divorce lawyer to small claims court if she does pay and the lawyer doesn't do the right thing. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted December 6, 2013 Report Share Posted December 6, 2013 I Agree basically with Ms TB except you can't assume the lawyer knew the loan was joint? not a very common situation for auto loans. My wife doesn't work and her car loan is in my name, title and registration are in hers so if we were to divorce it would be easy to say its her car and forget the loan is in my name. She probably doesn't even know that it is since I a pay all bills. Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted December 6, 2013 Report Share Posted December 6, 2013 I Agree basically with Ms TB except you can't assume the lawyer knew the loan was joint? not a very common situation for auto loans. My wife doesn't work and her car loan is in my name, title and registration are in hers so if we were to divorce it would be easy to say its her car and forget the loan is in my name. She probably doesn't even know that it is since I a pay all bills. If the divorce papers said that Mr was responsible....someone knew it was joint. Otherwise....why specify he's responsible. I think the lawyer just overlooked it...after all...don't we all occasionally overlook a 1099-INT etc. Nobody's perfect...human error. I can't believe, with all this social media...that the wife can't find the X. I wonder how much it would cost to hire "a professional". Quote Link to comment Share on other sites More sharing options...
mcb39 Posted December 6, 2013 Report Share Posted December 6, 2013 I don't see this as much of a fight. The worst thing that could happen is the IRS agent laughs. In our case, he didn't quite laugh. He did say that the IRS is not interested in what the divorce papers say. IRS law overrides civil law. They both signed the tax return so they are each liable for the entire amount of the tax owed. Besides that, we have community state laws to deal with. 2 Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted December 6, 2013 Report Share Posted December 6, 2013 In our case, he didn't quite laugh. He did say that the IRS is not interested in what the divorce papers say. IRS law overrides civil law. They both signed the tax return so they are each liable for the entire amount of the tax owed. Besides that, we have community state laws to deal with. But, it's a little different....your client had unreported income in a year when they filed jointly. In this case....we don't know the year the 1099-C was issued....or if it was issued after the divorce. Divorce = big mess How come I can find boyfriends from almost 50 years ago....and people cannot find ex-spouses? I'm still pinning it on the lawyer....his error....he gets to fix it! Quote Link to comment Share on other sites More sharing options...
Mr. Pencil Posted December 6, 2013 Report Share Posted December 6, 2013 If the divorce papers say it isn't her responsibility....it isn't her responsibility. That is not correct. The divorce settlement is an agreement between the two spouses. It is not binding on the IRS or any other third party. We have no information as to whether the attorney tried to get the loan released, but the lender is certainly not required to do so and typically would not without additional security or fees. So suing the attorney is a long shot, and can't even be done until she tries to mitigate the damage in other ways like filing for innocent spouse. Though no guarantee of success, innocent spouse would be easy and cheap to claim based on fairness and maybe lack of knowledge. But one of the requirements is that she not benefit from the loan. That could be hard to show since the car was part of the property division, especially if she used itr during or after the marriage. At least she must resolve the problem that she was in fact relieved of a legal debt. Meanwhile she can probably get a settlement adjustment or other judgement against him. But that would mean a private investigator would have to find him to serve papers, and she might be better off if he stayed out of her life. 2 Quote Link to comment Share on other sites More sharing options...
JohnH Posted December 6, 2013 Report Share Posted December 6, 2013 Did we ever ask how much tax is involved? And compared to a thousand or two in legal fees with possibly the same outcome, how does that stack up? Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted December 7, 2013 Report Share Posted December 7, 2013 It was $9000 in COD income, so how much tax depends on the total other income on the joint return. at 15% it would be $1350 of tax. Quote Link to comment Share on other sites More sharing options...
Guest Taxed Posted December 7, 2013 Report Share Posted December 7, 2013 An attorney will cost you more than $1350 so unless you want to throw your money down a sink hole. Pay it and consider yourself lucky that you got rid of that jerk! When was the last time a lender released one of the co signers if the other co signer was weaker? Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted December 7, 2013 Report Share Posted December 7, 2013 But....a phone call to the attorney who "screwed up" costs $0. Why are people so eager to pay? Quote Link to comment Share on other sites More sharing options...
joanmcq Posted December 7, 2013 Report Share Posted December 7, 2013 Have you ever phoned an attorney? Every phone call I made to my divorce attorney cost about $50. They had joint & several liability on the loan due to co-signing. She's legally responsible, even if she didn't get the car in the divorce. Suing ex is likely her only recourse. Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted December 7, 2013 Report Share Posted December 7, 2013 Have you ever phoned an attorney? Every phone call I made to my divorce attorney cost about $50. They had joint & several liability on the loan due to co-signing. She's legally responsible, even if she didn't get the car in the divorce. Suing ex is likely her only recourse. I "get it"...but: If the divorce papers said he gets to take care of the loan....and the attorney didn't do the paperwork....why is this NOT the attorney's responsibility? Attorneys can just screw up and walk away? If we "didn't file" a return....wouldn't we be responsible for the consequences (penalties & interest)? (No...I've never called an attorney...but I've heard stories.....) I wonder what Judge Judy would have to say about this........... Quote Link to comment Share on other sites More sharing options...
SFA Posted December 7, 2013 Report Share Posted December 7, 2013 Mr. Pencil brings up a good point. As advocates for our clients, we sometimes focus on only one side of the situation. While this can be a good thing, after all, they are the one who is paying our fees, it can still be healthy to step back and see a bigger picture. When we make a mistake, it is easy to look for others to blame--or to pick up the tab. The attorney did not buy the car, or sign the purchase papers. The attorney cannot override tax law by writing a divorce document. Divorces are messy, expensive and rarely perfect. Having said that, I will remember this scenario in future situations with divorcing clients. Find out the options on removing a spouse from the financing of vehicle and other loans BEFORE final papers are signed. Actually, sounds like one of the steps in Divorce 101. The more I think about this, I would be making a call to the attorney and he would be getting a pep talk and some pressure to track down the ex-spouse and help with the recovery (at no charge). Quote Link to comment Share on other sites More sharing options...
SFA Posted December 7, 2013 Report Share Posted December 7, 2013 If both spouses received a 1099-C for the same amount, is there a mechanism to "nominee" half of it to the other? The IRS should not be collecting tax on the same amount twice? Am not at the office, and am on the go today, but will be looking this up on Monday. 1 Quote Link to comment Share on other sites More sharing options...
Mr. Pencil Posted December 7, 2013 Report Share Posted December 7, 2013 Can we please scale back the assumptions in this thread? They do not make for good client service. Start with "the" attorney--we don't even know whether it was "her" attorney. If no kids, maybe they made their own amicable agreement and simply asked one attorney to get it through the court. Otherwise, what did the engagement letter say? Negotiating a settlement is one thing, but it gets expensive fast if you ask the lawyer to actually transfer title and clear credit accounts. Which might not even be possible at all. Maybe the lawyer advised selling the car, but the client agreed to keep it in exchange for other concessions. What does "husband was responsible for making the payments on the loan" in the original post mean? How exactly is that stated in the divorce decree? If he surrendered the collateral or compromised the debt, that might have been a legitimate out. All this is beyond the scope of our own engagement letter anyway. So let's focus on the tax issues. Like, the 1099-C. Was it even correct? Is there reasonable cause to abate penalties? Do we need an installment plan or other collections action? 2 Quote Link to comment Share on other sites More sharing options...
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