Every divorce is also a tax event. Filing status changes, dependency claims shift, assets move between spouses, and sometimes old IRS problems surface at the worst possible moment. Most of these issues sit quietly in the background until a client receives an unexpected bill or notice months or years after the decree is signed.
Family law attorneys are experts at dividing a marital estate fairly. But a settlement that looks equal on paper can be very unequal after taxes. A $400,000 brokerage account and $400,000 in cash are not the same asset if the brokerage account carries $250,000 of built-in gain. A client who keeps the house may not realize what the sale will cost later. And an IRS balance that the decree assigns to one spouse can still be collected from the other.
This guide is written for family law attorneys and their staff. It covers the red flags that suggest a case needs a tax professional, the core tax issues in divorce and separation, the IRS problems that can derail a settlement, and how a tax and bookkeeping practice can work alongside your firm to protect your clients.
Red flags: when to call a tax pro
Not every divorce needs a tax professional at the table. These do:
- Unfiled returns. Either spouse has missed one or more years of filing, or the couple doesn’t know whether returns were filed.
- Known IRS debt. There are balances due, payment plans, liens, levies, or IRS letters in the file.
- A self-employed spouse or a closely held business. Income is hard to verify, books are incomplete, or personal expenses run through the business.
- One spouse handled all the finances. The other spouse signed joint returns without reviewing them.
- Significant investment or retirement assets. Brokerage accounts, rental property, stock options, or multiple retirement plans are being divided.
- The marital home is being sold or kept by one spouse.
- Disputes over who claims the children.
- Cash income, crypto, or lifestyle that doesn’t match reported income.
- The divorce will finalize near year-end. Filing status for the whole year depends on marital status on December 31.
- A current or past IRS audit involving joint returns.
If any of these appear at intake, an early call to a tax professional is usually cheaper and more effective than cleaning up after the decree.
The core tax issues in divorce
Filing status
A client’s filing status for the entire year is based on marital status on December 31. If the divorce is final by year-end, the client files as single or head of household. If not, the options are married filing jointly or married filing separately, unless the client qualifies to be “considered unmarried” for head of household purposes (generally, living apart for the last six months of the year and maintaining a home for a qualifying child).
Filing jointly usually produces the lowest combined tax, but it comes with joint and several liability: each spouse is responsible for the entire tax on the return, including any later audit adjustments. For a client who doesn’t trust the other spouse’s reporting, filing separately may be the safer choice, even at a higher cost.
Texas community property adds a layer
Texas is a community property state. When spouses file separately, community income generally must be split between them, and each reports half, using Form 8958 to allocate. That includes wages and business income earned during the marriage. In the year of divorce, community income is allocated up to the date of divorce, which can produce surprising results if one spouse earned most of the income.
Children: who claims what
The custodial parent (the parent the child lived with for more nights during the year) is entitled to claim the child by default. The custodial parent can release the dependency claim and the child tax credit to the other parent by signing Form 8332. A decree that awards the dependency claim to the noncustodial parent is not enough on its own for divorces after 2008. The IRS requires the signed form or a substantially similar statement.
Some benefits never transfer. Head of household status, the earned income tax credit, and the child and dependent care credit stay with the custodial parent even if Form 8332 is signed. Settlement terms should reflect that.
Spousal maintenance and alimony
For divorce or separation agreements executed after December 31, 2018, alimony and spousal maintenance are not deductible by the payer and not taxable to the recipient. Older agreements generally keep the prior treatment (deductible and taxable) unless they are modified and the modification expressly adopts the new rule. Modifying a pre-2019 agreement without addressing this can change the tax result for both parties.
Child support is never deductible or taxable.
Property division and hidden tax
Transfers of property between spouses incident to divorce are generally tax-free under Section 1041. The receiving spouse takes the transferor’s tax basis, along with any built-in gain. This is where equal splits become unequal:
| Asset | Fair market value | Tax basis | Built-in gain |
| Cash | $400,000 | $400,000 | $0 |
| Brokerage account | $400,000 | $150,000 | $250,000 |
| Rental property | $400,000 | $180,000 (after depreciation) | $220,000 + depreciation recapture |
A tax professional can calculate after-tax values so the division is truly equitable.
Retirement accounts
- Employer plans (401(k), 403(b), pensions) require a Qualified Domestic Relations Order (QDRO). A distribution to the alternate payee under a QDRO avoids the 10% early withdrawal penalty, though income tax still applies unless it is rolled over.
- IRAs do not use QDROs. They are divided by a transfer incident to divorce under the decree. Done properly, it is tax-free. A client who withdraws the money first and then pays the ex-spouse owes tax and possibly the 10% penalty on the full amount.
- Roth versus traditional balances are not equal dollars. A $100,000 Roth is worth more after tax than a $100,000 traditional IRA.
The marital home
Married couples can exclude up to $500,000 of gain on the sale of a principal residence ($250,000 for single filers) if ownership and use tests are met. After divorce, a spouse who moves out can still count the period the other spouse lives in the home under the divorce instrument. Without that language, the spouse who moved out may lose the exclusion if the home is sold years later. Timing the sale (before or after the divorce) can also determine whether $500,000 or $250,000 is available.
IRS problems that can derail a settlement
Joint tax debts don’t follow the decree
A divorce decree can order one spouse to pay a joint tax liability, but the IRS is not bound by the decree. Because joint filers are jointly and severally liable, the IRS can collect the full balance from either spouse, including by levying wages and bank accounts or offsetting future refunds. The decree only gives the paying spouse a claim against the other in state court.
Before the settlement is final, it helps to know exactly what is owed. A tax professional with power of attorney (Form 2848) can pull IRS account transcripts for each year, confirm balances, penalties, and interest, and identify years with no return on file. That gives both sides real numbers to negotiate with.
Unfiled returns
If either spouse failed to file, the IRS may have prepared a substitute return using only W-2 and 1099 data, with no deductions, exemptions, or credits. The resulting balance is often far higher than the real tax. Filing accurate original returns usually reduces the debt substantially. Deciding how to file those back years (jointly or separately) is a strategic decision best made before the decree.
Innocent spouse relief
When one spouse understated income or overstated deductions on a joint return without the other’s knowledge, the other spouse may qualify for relief using Form 8857. There are three types:
- Traditional innocent spouse relief: for understatements the requesting spouse didn’t know about and had no reason to know about.
- Separation of liability: for divorced, legally separated, or living-apart spouses, allocating the understatement between them.
- Equitable relief: for underpayments (tax reported but not paid) and cases that don’t fit the first two.
Texas community property rules add another layer: a spouse may also seek relief from tax on community income that belonged to the other spouse.
Deadlines matter. Requests for the first two types generally must be filed within two years after the IRS begins collection activity against the requesting spouse. Equitable relief has a longer window but still depends on timing. A client who might qualify should be referred promptly.
Injured spouse claims
This is different from innocent spouse relief. If a joint refund is taken to pay one spouse’s separate debt (past-due child support, student loans, or a prior individual tax debt), the other spouse can file Form 8379 to recover their share of the refund.
Audits of joint returns
An IRS audit of a joint return can open after the divorce. Settlement agreements should address who will cooperate with an audit, who keeps the records, and how any additional tax, penalties, refunds, or professional fees will be shared. Leaving this out invites a second round of litigation.
Payment options
If there is a real balance due, a tax representative can negotiate an installment agreement, request penalty relief, request a collection hold while the divorce proceeds, or evaluate an offer in compromise. Knowing which of these is realistic helps attorneys structure the property division around it.
Divorces involving a business owner
When one spouse owns a business, income is often the most contested number in the case, and the tax return is rarely the whole story.
What the tax return may not show
- Personal expenses paid by the business. Vehicles, phones, meals, travel, family members on payroll, and home costs can reduce reported profit while supporting the household lifestyle.
- S corporation distributions versus salary. An owner may take a modest W-2 salary and much larger distributions. Both are real income for support purposes, even though only the salary shows up as wages.
- Phantom income. Partnership and S corporation owners pay tax on their share of profit whether or not the cash was distributed. A K-1 can show income that never reached the household, or the reverse.
- Depreciation. Large first-year deductions (such as 100% bonus depreciation on equipment or vehicles) can make a profitable year look like a loss on paper.
- Cash and payment apps. Revenue received through cash, Venmo, Zelle, or PayPal may not appear on any 1099, and Form 1099-K is now issued only above $20,000 and 200 transactions.
- Timing. Delayed invoices, accelerated expenses, or prepaid costs can lower income in the year the case is pending.
How a bookkeeping review helps
A practice that does both tax and bookkeeping can rebuild or review the general ledger, reconcile bank statements to reported revenue, separate personal from business spending, and prepare clean financial statements. That gives your valuation expert, your client, and the court reliable numbers to work from. Where a full forensic accounting engagement or formal business valuation is needed, a tax professional can help you identify that early and work alongside the appropriate expert.
After the divorce
The business-owner spouse often needs help restructuring: new filing status, new estimated tax payments, an updated payroll setup if salary changes, and possibly a new entity structure. The non-owner spouse may be filing alone for the first time in years and needs a plan for withholding and estimated payments, especially if they are receiving taxable retirement distributions or rental income.
Common questions from family law attorneys
Can the decree decide which parent claims the children? The decree can set the parties’ agreement, but the IRS follows its own rules. Unless the custodial parent signs Form 8332 (or a substantially similar statement), the noncustodial parent’s claim will be denied. Consider requiring the custodial parent to deliver a signed Form 8332 each year, conditioned on support being current.
Is spousal maintenance taxable? Not for agreements executed after December 31, 2018. Maintenance under those agreements is neither deductible by the payer nor taxable to the recipient. Pre-2019 agreements keep the old treatment unless a modification expressly adopts the new rules.
Should a still-married couple file jointly for the divorce year? It often saves tax, but it creates joint liability for everything on the return. If there’s any doubt about the other spouse’s honesty or reporting, filing separately is usually safer. When a joint return is filed, the agreement should say how any refund or balance due will be shared.
Who gets the refund on a joint return? The IRS issues one refund to the joint filers. It does not split it based on the decree. The settlement should spell out the division, and how future refunds or audit assessments for joint years will be shared.
Does an IRA need a QDRO? No. QDROs apply to employer plans such as 401(k)s and pensions. IRAs are divided by a transfer incident to divorce under the decree. The transfer should go trustee-to-trustee to avoid tax and penalties.
Can we get the opposing spouse’s tax records? For years the spouses filed jointly, either spouse can request transcripts of the joint return. For separate returns, you will need the other spouse’s authorization or formal discovery. With the client’s Form 2848, we can obtain the client’s full IRS account history quickly.
How long does a client have to request innocent spouse relief? For traditional relief and separation of liability, generally two years from the IRS’s first collection activity against the requesting spouse. Equitable relief has a longer window. Clients who might qualify should not wait.
Are our client’s legal fees deductible? Generally no. Fees for a personal divorce are personal expenses. The narrow exceptions mostly involve fees attributable to a business or rental property, so tell us if that may apply.
Can you testify or serve as an expert? Our role is typically to provide tax analysis, transcripts, returns, and bookkeeping support for your team. Where formal expert testimony, forensic accounting, or a business valuation is needed, we can work alongside the appropriate specialist.
How we work with family law attorneys
Our goal is to make your job easier and your client’s outcome better, without stepping into your role. Here is what a referral typically looks like:
- Quick consult. You or your client contacts us with the basic facts. We’ll tell you quickly whether there’s a tax issue worth addressing and what it might involve.
- Power of attorney and transcripts. With the client’s signed Form 2848, we pull IRS account and wage-and-income transcripts to confirm what has been filed, what is owed, and what the IRS has on record.
- Analysis. Depending on the case, we prepare after-tax comparisons of proposed property divisions, filing-status comparisons, back-year returns, income reconstructions from business records, or innocent spouse requests.
- Clear reporting. We provide plain-language summaries you can use in negotiation or mediation, and we’re available to answer your questions as the case moves forward.
- Post-decree follow-through. We prepare the client’s returns in the year of divorce and beyond, set up estimated payments, and represent them if the IRS comes calling.
We communicate with you on the timeline your case requires, and we coordinate with any valuation or forensic experts already involved.
A short checklist to keep at intake
- Have both spouses filed every required return?
- Is there any IRS balance, letter, lien, or levy?
- Does either spouse own a business or receive self-employment income?
- Are investment accounts, rental property, or retirement plans being divided?
- Is the house being sold or retained?
- Who will claim the children, and has Form 8332 been addressed?
- Will the divorce be final before December 31?
Two or more “yes” or “don’t know” answers are a good sign it’s time to bring in a tax pro.
Let’s talk
We welcome referrals from family law attorneys and are happy to serve as a resource for your firm and your clients. Call or email to discuss a case or set up an introductory conversation.
- LP Tax And Bookkeeping Pros LLC, McKinney, TX 75072
- Phone: 303-881-9762
- Email: ralphp@lptaxandbookkeepingpros.com
- Web: www.lptaxandbookkeepingpros.com
This article provides general tax information for legal professionals and is not legal advice or tax advice for any specific case. Tax treatment depends on the facts and on the terms of the decree.