Tax audits are an unfortunate possiblity after divorce
A divorce is something that most people simply wish to finish and put behind them. Unfortunately, the Internal Revenue Service can force people to relive the divorce process and re-examine its financial outcomes by auditing newly-divorced individuals.
Even people who are in a happy marriage may need to be ready for a post-divorce audit, as divorce rates remain high in the U.S. For example, over 50 percent of the marriages in the U.S. now end in divorce, and it's even more prevalent for people who are on their second or third marriage. Sixty percent of second marriages result in divorce, while a 73 percent of third marriages have the same outcome. The average American marriage lasts eight years.
The IRS will become aware of your divorce when you file as "head of household" or "single" after filing with a "married" status in previous years. The IRS can then determine whether or not you should be audited by reviewing financial information that came out during divorce proceedings. Things such as undisclosed income and hidden assets can sometimes be revealed during a divorce in order to make sure that there is equitable distribution between spouses. However, a judge is also ethically obligated to report to the IRS any inconsistencies found in a person's finances.
Once a divorce is finalized, the IRS has a three-year period to audit finances from the years in which a couple was married. This time period can be extended, however, if there are significant discrepancies or evidence of fraud. If you find yourself being audited due to an ex-spouse's shady finances, one option is to seek "innocent spouse relief." Being designated as an innocent spouse may allow you to avoid penalties for your ex failing to report income or improperly reporting items on joint returns.
The IRS grants this relief on a case-by-case basis. Protecting yourself from an audit can require sound tax and legal knowledge, however. Any Maryland resident who feels they are being unfairly audited for the actions of an ex-spouse during their marriage should consider getting professional legal help as soon as possible.
Source: Forbes, "Divorce Causes Tax Audits" Cameron Keng, Feb. 10, 2014