The IRS Is Watching Your Divorce

Video Transcript 

My name's Robert Bonavito, New Jersey Forensic Accountant. This video is part of a series of videos where I discuss Forensic Accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions, based on different facts and circumstances.

Hi. My name's Robert Bonavito, New Jersey Forensic Accountant. Today's topic is "The IRS is watching your divorce." We get involved a lot of matrimonial matters and usually taxes become relevant at some point. And the reason the IRS is watching, I mean I have letters from the IRS written to people who are divorced asking for a copies of their divorce agreement. Because they wanna go through it and see if there is anything in there. If the alimony isn't structured right, you know, if some assets were transferred without proper taxes, they can go in there and make some money.

For example, when you're getting divorced of course, you know, alimony is a deduction to the spouse paying it and it's income to the spouse receiving it. If you keep the house, you get the basis of the house. If you get to claim the children, you can deduct that on your tax return them as dependants. If there's retirement issues, there is stock basis.

I had a recent case where we had a portfolio of $2 million in a divorce matter and the client called me up and they went through the divorce. I said, "Why don't we go in and look at the two portfolios?" Because they were in separate accounts worth about $1 million each. And so we went in and looked at the portfolios. Let's say, that's one and this was the other one. This one portfolio had a basis of $100,000, and this had a basis of $900,000. Now what do I mean? The stocks in this portfolio were purchased for $900,000. These were purchased for $100,000.

Okay, so here the taxable portion if they sold that would be $900,000. Here would be $100,000, okay. And we looked at the investments and we determined they were approximately the same risk. So we told them to take this portfolio, okay. And here's what happened, you know. This spouse sold their stock. They paid, let's say, the one, let's say, 33%. They paid $300,000 in taxes, okay. They sold their stock, they paid $30,000, $270,000 saving just by doing a little bit of tax planning and there are so many other opportunities to do tax planning by thinking now, you know.

We were paid to do this so we gave our client the best advice. They didn't feel...they didn't have anybody in their side looking at it. Because they may have found the same thing, may not have. They could have been focused, their attorneys are focused and...attorneys are focused on other issues. More important issues, quite frankly. Like child, you know, things to deal with children and things like that.

We're focused on the numbers. And so, if you are thinking about or getting a divorce, it's usually worth your while to take a look at the divorce from a tax standpoint. Because remember, the IRS is looking at this and they're looking at this portfolio. They expect to get $300,000 when it sold. And they sold it right away. I knew that. And my client sold theirs too. But, like I said, they walked away with $270,000 more. It's a lot of money. My name is Robert A. Bonavito. If you have any questions about this video, feel free to email me.