Taxes and the Importance of Financial Honesty in Divorce

Hidden assets are a common occurrence in many marriages. When the relationship comes to an end, however, it is likely that any financial deception will be unearthed with severe consequences not only during the divorce but also when tax season rolls around. Thus, it is essential that Virginia couples provide a clear, consistent and honest account for all assets and debts during divorce proceedings.

The National Endowment for Financial Education has found that financial infidelity otherwise known as financial deception, occurs in—and has an effect on—a significant number of relationships. Specifically, the organization’s online survey suggested that one in three persons who combined finances in a relationship also committed financial deception. Such practices include hiding bank accounts, bills or purchases and providing inaccurate information about income or debts.

The reasons for financial infidelity vary widely and may be as innocent as a desire to retain some financial privacy after marriage. However, divorce tends to bring these issues to the surface not only in court but also on tax records. At the end of a relationship, spouses can avoid divorce complications and confrontations with the Internal Revenue Service by coming clean about hidden assets.

It is safe to say that the IRS will find out about any divorce when tax season rolls around. According to Forbes, the change in marital situation is clearly reflected in a switch from filing jointly or separately in marriage to filing as a single person or head of household. Furthermore, the divorce proceedings are likely to include an extensive investigation of both spouses’ assets, debts and incomes to ensure equitable property division.

Financial inconsistencies are not only a warning sign of monetary deception to the other spouse. They also are a red flag for the IRS, and the judge presiding over the divorce is required to report them. Then, the IRS has a sliding timescale to audit the finances in question. Specifically, persons who are found to have committed fraud are subject to audit for the foreseeable future. In general, however, the audit must occur within three years of the divorce with an extension to six years in cases where a discrepancy of more than 25 percent exists. The best way to avoid the headache of having the IRS slice and dice the divorce is for both spouses to come clean to each other and the federal government.