"Probably the last thing a divorcing couple thinks about," says accountant Alan Zipp, "is the tax consequences of the divorce. Most people don't even know that they are subject to taxation as a result of divorce transactions.
"So they may wind up paying Uncle Sam money that could have gone to their kids or each other.
"And divorced individuals are more and more often being assessed back taxes, interest and penalties for not properly reporting taxable transactions relating to the divorce."
Some examples Zipp gave accountants at a recent professional-society meeting:
The Forbeses had am amicable divorce in 1973. Mr. Forbes transferred the house to his wife and paid off the mortgage. Mrs. Forbes released him from any further obligations to her. When the Internal Revenue Service audited his taxes the next year, they discovered he had not paid taxes on the "gain from the sale or other disposition of property."
Since the house had cost $10,336 and had a market value of $23,500 when he transferred it to his wife, the IRS claim he owed taxes, interest and penalties on about $13,000 of unreported income. Forbes sued the IRS and, last year in Masaachusetts, lost the case.
In a routine tax-return preparation, Zip notified his client that her alimony payments were taxable. In tears, she described a bitter divorce in which her husband had demanded his share of the value of the house in cash. His attorneys were forcing the sale of the property to provide the money.
On her $10,000 salary, she couldn't afford to rent a nearby apartment for herself and her three children. She "begged and borrowed" the necessary $25,000 and vowed to "get back" at her ex.
So she notified the IRS that her ex-husband had realized a $20,000 gain on the sale of the home to her -- which he hadn't reported. The IRS hit him with back taxes, interest, underpayment penalties and a 50 percent fraud penalty for deliberately not reporting the income.
Zipp, who recently authored a booklet on "Divorce Tax Facts," became an expert on the subject over the last six years because his Silver Spring office is next to three divorce attorneys.
"The lawyers referred them to me. I found that there are many marriage counselors and attorneys," he claims, "who simply do not know the application of the [tax] code to divorces.
"Tax courts are full of the problems that come from lack of proper tax planning in a divorce. And traditionally, when sued for back taxes, the defendant says, 'I didn't know I had to pay them."
Citing Judge Learned Hand's contention that "There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible," Zipp advises all divorcing couples to consult a certified public accountant. "It's tax deductible."
He also suggests asking the divorce attorney to earmark 30 percent of his or her fee as "tax advice" so that portion will be deductible.
Zipp lists these major tax considerations of divorce:
Property settlement -- While federal law governs taxation of property transactions, state law determines who owns specific property. And state laws are constantly changing. (Effective last year, Maryland adopted an amendment that makes each spouse an equal co-owner of property acquired during the marriage.)
"Obviously, there are a number of ways to divide property between divorcing spouses. To minimize the income-tax effects of a property transfer, try to meet state legal requirements for joint ownership of all marital property since the equal division of jointly-owned property is non-taxable."
Lists the value of all property (including support and marital rights) exchanged. "If you don't, the value determinations made by the IRS during a tax audit will be difficult to refute, particularly since the courts presume that the IRS is correct in its determinations.
"If property is to be treated as a gift, it must be given before the divorce separation agreement is signed and should be acknowledged as a prior gift in the agreement."
Support payments -- Alimony is taxable to the recipient and deductible to the payer. Child support is tax-free to the recipient and non-deductible to the payer.
To be considered child support, "Periodic payments to a wife must specifically state the amounts allocable to the support of the children." Thus if all payments are designated "for the wife for the support of herself and the children" the entire amount is considered tax-deductible alimony.
Dependence exemption -- If both parents claim a dependence exemption for the same child, "the IRS computers will pick it up and disallow the exemption for both -- pending an audit of the returns."
Filing status -- "Even though a couple is going through a separation, they can probably save money by filing a joint return."
In each of these area, notes Zipp, "If spouses are willing to negotiate, both may benefit."