Unfiled Tax Returns and Divorce

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Sometimes we see cases where a couple is getting divorced and they have unfiled tax returnsfor many years. The question then raised is whether the unfiled tax returns should be filed as joint tax returns or if the income tax returns should be filed as married filing separate returns for the back tax years.

The reason it is often best to file a joint income tax return vs. a married filing separate tax return is the overall tax bill will likely be lower with a joint tax return filing. This is especially the case where one spouse earns a lot more income than the other spouse. In a divorce, it is common that the parties are not in a cooperative mood, so one has to be careful to make sure that each spouse understands that taxes could be higher in total if they do not cooperate with a joint tax return filing.

If one spouse files a separate return for the unfiled tax return years, and they itemize deductions, then the other spouse is forced to itemize their deductions as well. If a couple has unfiled tax returns, this decision will have to be made for each year in question. As this relates to children, if the taxpayers are filing separate tax returns the decision has to be made as to which parent can take the child as a deduction. Usually the parent with the custody of the child gets the deduction for that child. If both divorced spouses can take the child on their tax return as a dependent, the tie breaker rules cause the taxpayer with the higher income to take the child as a deduction. The problem with this is that other tax rules limit the benefit of the deduction for the child as one income goes higher, therefore, you need to be careful with this and this is why it might be better to file joint tax returns for the years of unfiled tax returns.

If one ex-spouse files a joint tax return for each year of the unfiled tax returns, and an expected refund is taken by the IRS since the other ex-spouse did not provide all items of income and the IRS levies a tax and takes the refund, the ex-spouse not party to this wrong doing can file an injured spouse claim to get the refund monies that are owed to him or her.  There are also similar rules related to extra taxes caused by understated income on the filed tax returns, and the spouse effected who did not understate their income can file an claim to correct this. Therefore, there are methods to limit the risk of filing jointly but one has to be careful with this decision.

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