What happens when family law and tax law collide?
Got your attention, didn’t I?
Although I do believe there is a story in there someplace, it is based upon a real example of what happens when family law and tax law collide. As a CPA, I get this situation all the time. When couples are in the midst of a marital discord moving toward marital dissolution, (Okay, I am trying to avoid using the term divorce), and they have minor children (as opposed to major children), there is always the possibility of disagreement about who will claim the children for tax purposes. I know, this is a real shocker bob to most of you, but in marital matters it seems that the parties do not always agree to what is in the best interest for them or at least for the child(ren.)
TYPICAL SCENARIO
A client comes to my office to have his or her tax return prepared. I am sitting behind my solid walnut desk with my tax software open on my computer, entering information from the provided paperwork and from listening and discussing with the client. Generally, somewhere toward the beginning of the exchange of information, there is a reveal that the client is in the process of getting a divorce (so I finally used the term, sue me, just kidding.) Golly gee whiz, Batman. That sort of changes everything (e.g. filing status, dependency info, child tax credit, and the refund or balance due.) My next question is how many attorneys are involved and what are their names (inquiring minds want to know). As a side note, never assume that there are always two attorneys. In Collaborative Law, there is only one attorney, and there are times when the court assigns an attorney to represent the children, aka Minors Council. Then there are times when the client fires their current attorney and moves on the next, more aggressive and nasty attorney. Please refer to the movie “The War of the Roses” from 1989 starring Michael Douglas and Kathleen Turner, if you would like an example of just how aggressive and nasty a relationship can become.
THE CONUNDRUM or as Paul Simon said, “What’s the plan, Stan?”
With a big sigh and Hi De Ho, I press on. Here is the problem. Most of the time, the spouse sitting in front of me has no idea what the other spouse and his/her attorney is planning. It is not for lack of trying or incurring massive attorney fees to get an answer. No, it is because no one wants to make a decision and, in marital matters, it seems that every decision affects every other decision. In an effort to avoid having this matter take up my entire day, my recommendation is to claim all the children file the return and let the family law court settle the matter. The only problem is that the other spouse and their attorney had the same idea. That means, we are off to the races to see who files first. First to file gets the proverbial electronic checkered flag. The runner up gets their electronically filed return rejected by the IRS. Now what?
THE SOLUTION – SORT OF
As part of my due diligence, I will inquire as to who is entitled to claim the children. The immediate response is “ME.” Not willing to take the first answer, I will spend a bit of time explaining the rules. Generally, the amount of support and sleepover nights will give a good idea of who, in theory, should be entitled to claim the child(ren). Or at least until the divorce is final and, I am going to make a big assumption here, the martial dissolution agreement has been crafted in such an elegant manner as to state which spouse gets to claim the child(ren) and when. Remember, this is all theory. When it comes to family matters, absurdity and the bizarre can be both a tool and a weapon. If my client wins the efile race, then that, as they say, is that. If not, there are two possible solutions:
- Get the other party to amend their return (Oh, like that is going to happen) or
- Paper file the return, wait the 6–9 months for the IRS to process the return.
When the notice from the IRS finally arrives in the mail, seeking clarity as to who is entitled to claim the child(ren), then the next race begins. And that, as they say, is a story for another night or blog. Since is story involves children, it is time to close the book, turn off the lights and go to sleep. And we all say Goodnight Moon!
Gary Weiss
Gary is a graduate of the Marshall School of the University of Southern California. He founded and operates a boutique accounting firm dedicated to bringing high - quality tax preparation, tax planning and tax resolution services to individuals, small businesses, small nonprofits, family owned businesses and start-ups, at an extremely affordable price. Visit Gary Weiss CPA.