Dilemma Re: Letter received from taxpayer's estranged Spouse

[GraceNY]

Seeking input on the following:

Taxpayer's spouse abandoned the taxpayer late 2022.  They are in the process of filing for a divorce this year.

I suggested they file Married Filing Jointly as it is a more favorable filing status.  The taxpayer and spouse have been communicating through their attorneys.  I put the 2022 return on extension .  

Last week I received a Certified Return Receipt Requested letter from the estranged spouse stating they were not going to sign the e-file forms because the taxpayer spouse "has significant unreported income that is not reflected on the 2022 1040 tax return and therefore will not be filing MFJ."

The taxpayer is the only one with income (2 W-2's & 1099-NEC).  One of the W-2's is from a restaurant and it shows Social Security Tips being reported.

Would it be unethical of me (conflict of interest) to ask the taxpayer if there is any other income besides the tax documents they provided due to information I received?   I do not send an organizer or letter of engagement.  However, in my cover letter that goes out with the return, I say "that I have prepared the return based on the information provided to me, please review the return and let me know if any changes need to be made".

(BTW the Certified letter came while I was away and the post office was holding my mail.  I received it when the post office delivered my mail in bulk.  The green card still attached.  The last scan according to the tracking # was that it was in transit.  Never out for delivery or delivered.)  Not suggesting anything unethical, just an FYI.

Thanks in advance for your feedback.

Grace

 

[Lee B]

I didn't use to have an engagement letter either but I have always had a tax organizer, which some clients filled out and other clients made a half hearted attempt.

Lesson learned, now I insist that every client sign the engagement letter and complete the tax organizer.

This year I handed back two client's tax organizer and all their tax documents and told them to come back when their tax organizer was complete.

Last year I filed MFJ for a divorcing couple who were longtime business clients for 30 years.

Big mistake, in the future I will always file MFS in this situation!

[Abby Normal]

Tell the taxpayer that whenever you see a 1099-NEC, you always ask about additional self-employment income that is not reported on a 1099, because most self-employed people have that. If they lie and say no, I'd recommend that they go to another preparer. And really, you should probably recommend that anyway. You don't want liars and cheaters for clients.

[BulldogTom]

I don't like divorcing couples.   I try to run them off by telling them that I will not do their returns unless they can work together to get the best result for their overall tax situation.   I tell them they need to agree which checking account the refund will go to (if there is one) and who is writing the check to pay the taxes if there is a balance due.   I promise them that if they fight in my office I will hand all their documents back to them and not complete the return.   So far it has worked.   But I may just have been lucky.  It is a conflict of interest trap to do MFJ for divorcing couples.  It just can't turn out right.

@GraceNY My first blush take is the estranged spouse is angling for an argument in court that the other spouse makes more and therefore the halves should be bigger.   I would run from it.   Hand them back their docs and say "sorry, I cannot help at this time".  Send back a certified letter the the estranged spouse terminating the engagement, and CC the attorney.

Tom
Longview, TX

[Sara EA]

You have one spouse accusing the other of unreported income.  You don't know if this is based on fact or supposition or which one is being less than truthful.  Tell them to each find a new preparer because the IRS would consider it a conflict of interest if you prepared both their returns.  No need for further explanation.  Invite them to come back as clients when the divorce is fianalized.

[Lee B]

I agree, 3 years ago i terminated two long term clients who were legally separated at 12/31, when i discovered one spouse was not truthful.

I mailed them each a letter along with their tax documents saying that I could not prepare their tax returns due to a "conflict of interest."

[schirallicpa]

I'm in the middle of divorcing couple right now.  And what should be very straightforward just gets messy with people.  I don't know why you are afraid to ask if they have other income they are not claiming. You should always ask that question regardless of what they have given you.  It should be outlined in the engagement letter that you should always make them sign.  You have to be a hard-nose with divorcing people. As a rule of thumb - divorcing people should just file MFS.  Don't even entertain the idea that they should be able to get along.

[Pacun]

I will just say it... who cares if they will save some money in taxes by filing jointly if they will have to fork it out to the lawyers. 

While we, preparers, hate divorcing clients, the IRS loves them because they share extra information and the IRS wins most of the time. 

[Catherine]

Send the documents back to the person whose documents they are, with a "can't help, there is a conflict of interest" letter to each. If someone kvetches about it being last minute, you could probably say that "working together" has fallen apart and you cannot be in the middle. Nothing else; let the lawyers gripe at each other!

If you really want to keep one of the two, tell that person you can complete their return as MFS but cannot discuss anything about the other spouse's situation, at all. If you don't have a well-enough-trained forgettery (opposite of memory) and recall info for the other spouse that will negatively impact your retained client, tell them you can only work for them as of next year. 

And make sure you get an engagement letter signed from whoever you do a return for. Always, always, always. There are specialty engagement letters available online just for divorce situations. Drake has a standard Eng Ltr as part of the program. The Tax Book has an Eng Ltr and also a Conflict of Interest Waiver, too, if you have a subscription to their book or online resources.

[Terry D EA]

I totally agree with Catherine and Sara EA and highly recommend you take their advice. Trying to prep the returns for both spouses in a divorce presents a conflict which you cannot be part of. I don't think a conflict waiver would work for me in this situation either. Can't even see how it would apply. Again best advice, return their documents to them with a letter outlining the conflict and wash your hands of it.

[Sara EA]

5 hours ago, schirallicpa said:

Don't even entertain the idea that they should be able to get along.

I once caught a divorcing couple making out in my office. Never say never....

[Medlin Software, Dennis]

Forgettory! Excellent word. Mine is absent minded though, attributed to kids and grand kid taking my brain cells. 

[Catherine]

21 hours ago, Medlin Software, Dennis said:

Forgettory

Very useful word, and yes it can be trained. I've trained myself to only remember tax info when a file is open in front of me. Once it's put away, I'm clueless. Stops people from asking me questions about their returns at church, in the grocery store, etc. "Sorry; can't remember outside my office!"

[Margaret CPA in OH]

A late client, into her 90's, frequently used the excuse of an active forgettery when she couldn't remember something.  It was endearing coming from her and an important part of my life and vocabulary now as I near 80!