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IRS ramps up review of divorce

The Internal Revenue Service (IRS) is not a government agency that people are excited to deal with. Add this agency to the already difficult emotional landscape that comes with the parties navigating a divorce and things could get interesting.

Why does the IRS care about divorce? The IRS cares about any relationship that results in a financial transaction. When it comes to divorce, couples are often moving money around. Many assets transfer during divorce without impact by the IRS. Others do not.

The IRS became even more interested after the passage of the Tax Cuts and Jobs Act (TCJA). This new law completely changed how the agency treats alimony payments. The IRS is involved when it comes to alimony. In the past, the agency would tax the person receiving alimony. This led to a tax break for the person making the alimony payment. The TCJA removed this provision from the tax code and shifted the tax burden back to the person who made the alimony payments. This removed the financial benefit of the alimony payment and, according to divorce experts, hurt negotiations.

As a result, those going through a divorce are coming up with other ways to transfer money to achieve the same goal but still reap a tax benefit. Legal ways are available … at least until a new tax law goes into effect that removes these alternative options.

Enter a new question from the IRS. A recent report by Accounting Today notes the agency is slated to begin asking for additional information about alimony and divorce on Schedule 1 of the Form 1040 for 2019 tax returns. The move could be a sign the government is gathering information to propose legislation to close legal loopholes for divorcing couples. If nothing else, it serves as a reminder of the importance of seeking legal counsel when going through a divorce to better ensure your interests are protected.

We will follow this development and provide updates as they become available.