When Child Support/Alimony Ends Unexpectedly

One of my favorite attorneys has a legal segment on our local TV channel.  I had a chance to see it this morning.  The audience poses questions that the attorney has a chance to answer, albeit in a very restricted timeframe (we must get to the commercials, you know!).  One of the questions was from a mom who was receiving child support prior to her former spouse losing his job and being unable to pay support.  This is always a tough situation, particularly in this economic time with unemployment truly being around 10%.

If one had the time to ask the questions, one of mine to the mom would be, “Does the former spouse have a 401(k) or other ERISA plan that they had been contributing to – or one that is still in effect and dormant?” 

If so, a Qualified Domestic Relations Order could be prepared by an attorney and signed by a judge. That retirement plan could then be tapped in order to catch up the back child support or alimony.  Granted, it will cost some money to have the QDRO prepared by an attorney and signed by a Judge, but it is possible in these situations to go back to tap something that might have been a marital asset in the past and might not be considered as a way to catch up the arrearage.

It’s worthwhile to know that the tax liability of raiding the retirement plan will be paid by the participant, in this case the former spouse.  While this is a process that is used a great deal across the U.S. it is not seen as often in Iowa.  Of course, many times no retirement plan exists for the former spouse. It’s worth asking the right question.

It’s a tough place to be for both mom and dad in these instances.  The key is whether this creates substantial hardship on the child.

Unsuspected Pain

It’s been a very unusual week.  On Sunday I learned that my first husband of 18 years had died suddenly.  Our marriage was one of very few arguments.  There was no need.  I read in his obituary published today that his children wrote, “There were no gray areas with him.  It was either right or wrong.”  That was true.  My ideas and thoughts were nearly always wrong in his mind and he would make that quite clear.  As I continued to read I read of his marriage to his first wife who was listed, and then I read about our daughter who appeared to have had no mother.  One more attempt at a hurtful jab.  But it did not hurt me.  I understand completely that he never got over the anger and desire for revenge for my attempt to change the circumstances of my life.  I gave up my negative feelings years ago, and except for one cursing phone call he made to me after the divorce was final, we never spoke again.  I hope now he has peace.  I’ve had peace for some time.  In his mind he was right.  I did what was right for me.

I finished a two-day trial last week that began with 15 hour days of income tax analysis.  The additional experience of the death of my ex made me realize the different kinds of hurt that people inflict on each other during divorce.  It is sometimes verbal.  It is sometimes physical.  In my case it was an emotional type of abuse in attempting to alienate people who had been close to me in my hometown.  But I realized in the divorce case I completed last week that many times there is an unsuspected pain that can come much later – even years after the divorce has ended.

This pain can be created by an initial intention to reduce the effect of income taxes through business deductions.  How can this cause pain, you ask?  Imagine the surprise you would have if four or five years after your divorce you were called into an IRS audit over tax returns you filed with your former spouse.  You would have thought that marriage was long over and behind you.  What you might find ahead are responsibilities for back taxes, penalties and interest because you signed a joint return that was fraudulent.

This is the possibility for my client in the most recent case.  Let’s call the parties “A” and “B”.  Party “A” had a small business for several years.  Party “B” had all W-2 income.  As I meticulously tore apart and recreated “A’s” Schedule C with subpoened documents from the CPA I realized there were huge discrepancies in the amount of deductions that were appropriate and those that were not.  It was so very blatant that one of the outside CPA’s called to testify on “A’s” behalf discussed his concerns about the deductions that were taken in testimony.

As the trial wore on even “A” admitted that the tax deductions were incorrect.  Later testimony indicated that “A” had been planning the divorce for the last three years, and that fit with the reduction of income, but also an increase in deductions of over 90% of gross receipts.  I was astounded that these clients had not been audited.

“B” was also shocked.  “B” hadn’t attended the CPA meetings for many years because they were boring and not of interest.  W-2 income was cut and dried and all that discussion just didn’t make any sense.  “B” unfortunately learned a hard lesson.

At this point my job will be to guide “B” to a compentent tax attorney for protection in the instance of a future audit.  The only good news that I can see in this case is that “B” has a head’s up knowing that possibility is over one shoulder going forward.

This is definitely a ‘marital gift’ that could keep on giving into the future laying tens of thousands of taxes, penalties and interest at both parties’ feet.

I understand the concept of taxes being horribly dry and boring.  I happen to love tearing apart the tax return to figure out who is doing what.  This was a case that made me nearly sick to my stomach.  I don’t believe “A” had the intention to hurt “B” with the tax situation – it was merely a way not to have to pay taxes.  However, it could very easily hurt them both.  I hope I can acheive my goal of helping to protect my client from that Unsuspected Pain.

On a joint tax return, both parties are responsible for what is reported or unreported.  It is vital that, if nothing else, a second opinion from an objective CPA for the ‘uninterested’ spouse be consulted if there is business income that is in the least bit suspicious.  I see a great deal of this in my work, but I have never seen it to this extent.

Protect yourself from the Unsuspected Pain.