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Potential property division and tax issues during divorce

When it comes to dividing property, divorce can be a complicated process for many California couples. The state’s community property laws with respect to marital debts and assets may not always seem intuitive.

The first step is separating marital assets from separate property belonging to only one spouse, such as gifts or inheritances. Obligations and assets must also be examined to determine whether they arose before or during the marriage. 

An experienced divorce attorney can help couples take inventory of their marital assets, perhaps with the assistance of an accountant. That process will hopefully reveal any hidden assets or income streams. However, readers may not have known that a judge is authorized to report reasonable inconsistences in marital valuations to the Internal Revenue Service. That means that a couple might have to answer questions about tax returns they filed during their marriage, perhaps up to three years after their divorce.

If IRS officials believe the amount of the disputed valuation exceeds 25 percent, their review period might be extended to six years. Furthermore, if officials believe that the discrepancy resulted from fraud, the statute of limitations may be tolled indefinitely.

A family law attorney can provide assistance even in this situation, however. For example, innocent spouse relief is a federal protection for individuals against a spouse who -- without their knowledge -- hid or misreported income on tax returns. If officials believe that a former spouse may be partially liable, the percentage of tax might be allocated under an option called separation of liability relief. If there were other extenuating circumstances, a spouse might also have an argument for equitable relief.

Source: Forbes, "Divorce Causes Tax Audits," Cameron Keng, Feb. 10, 2014

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