Monday, July 16, 2012

The 'Cheaper to keep her?' Case

The taxpayer in this case was denied a deduction for a $20,000 lump sum of 'alimony' paid in settlement of all future alimony obligations. Unfortunately, when he drafted the settlement contract he neither referenced the appropriate clauses of the original agreement nor included a clause that the $20,000 would not need to be paid if his former spouse died within the short period of time between the signing of the settlement agreement and the paying of the $20,000. In order to be considered alimony, payments must cease at the death of the recipient. That is the way the law is written and the tax court had no alternative but to rule against the taxpayer in this instance. I find that attorneys working divorce cases often fail to consider what is necessary to preserve the most advantageous tax situation for their clients when drafting various agreements. It is worth consulting with a CPA as a part of the divorce.

The taxpayer's bad luck with attorneys continued in that his attorney at tax court did not even offer a reasonable cause defense in response to the additional accuracy related penalty the IRS had assessed. This penalty comes in to play when your income is significantly understated. It is based on percentages so if your income is not that high it doesn't take that large of an error to incur this penalty.

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