Marriage & Divorce Under the Tax Cuts and Jobs Act of 2017 - Part I

The Tax Cuts and Jobs Act of 2017 (“TCJA”), as it applies to marriage and divorce, is 4-months-old as of the time of this article’s draft. As a former practicing CPA, who is now a professional mediator, I pose the following question: What has TCJA done to help couples improve the statistics regarding the institution of marriage and make the emotional issues of divorce less stressful?

I have not done any empirical research on either and my discussions with colleagues that handle divorce mediation have indicated that business has not been reduced. So I suppose the answer is that Washington has only created more work for the professionals who are intricately involved in helping couples sort out their issues in the hope of arriving at an acceptable, negotiated separation. The purpose of this article, which will appear in three installments, is to highlight those topics that should be included when dealing in this area. Since we are now into 2019 I will not focus on Tax Cuts & Jobs Act as it affects 2018 divorces other than to say if you were finally divorced or separated on or before December 31, 2018 alimony payments may still be made and are deductible by the payer and income to the recipient. This rule is effective unless the agreement stipulates that the new law will apply.

Before getting into specifics of the new tax cuts law, there are some administrative steps that should be reviewed by the attorneys because they may raise other issues that go beyond the scope of this article. They could lead to other causes of action that would take the couples out of the area of divorce and into criminality issues. While women are now rising to positions of leadership in their chosen professions, and generating significant income, for this article I will assume, unless otherwise stated, that the Husband is the primary income earner.

When a couple decides to divorce one of them, generally the non-working spouse gets a new attorney. It is not infrequent that when the new attorney asks for copies of tax returns the spouse has commented that “I never signed a tax return nor do I have copies of them. My husband handled it all with his accountant.” Another comment that has sometimes been attributed to the spouse is, “He never filed a tax return nor does he pay taxes.” Obviously, this is a tough way to begin a new professional relationship with a client but let’s review what steps can be taken to overcome these potential problems.

{Note: If a spouse makes a comment regarding never filing or paying taxes, you, the professional, should ask why she had not filed a separate return using her own information so that she would not be part of this particular problem.}

Engagement Letter and Tax Return Filing Authorization:

While it is not a required standard to obtain an engagement letter from a client for preparation of an individual tax return, it has become a best practices recommendation. Generally the letter is issued to the couple, sets forth the nature of the engagement, how the fees are determined, the documents that the couple are to provide, and other matters relating to the preparation of the report, the retention of the documentation, and what services are not covered by the engagement letter (e.g. a subsequent tax audit). The letter requests that both of them sign, date and return the letter to the accountant before work commences.

Under the current tax law, federal and most states prefer that tax returns be electronically filed rather than paper filed. This requirement has been in effect for a few years and the burden of e-filing returns has been an additional pressure to the accounting profession. Before returns are filed the clients must sign, date and submit separate e-file authorization forms to the tax preparer which are then used as the basis for submitting the returns to the governmental agencies. For those not wanting to electronically file returns, there are signed forms that are submitted to the preparer (and may also be attached to the filed returns) in which the clients opt-out and choose to submit paper returns as in prior years.

In many accounting firms clients are instructed to whom or what department in the firm the engagement letter and authorizations should be directed and this person (or someone in the designated department) is charged with the responsibilities of seeing that the letters are properly signed and dated, recorded in the taxpayers’ file and notifies the tax preparer that all the paperwork was received so that the tax work can be prepared and the returns eventually released. When the new attorney contacts the tax preparer for copies of the documents his client does not have, it may be the first time that the accountant will actually look at the file to review the engagement letter and tax authorizations as well as tax cuts implication.

While the accountant should also request an authorization from the spouse to release the tax returns, the preparer’s responsibilities with respect to the engagement have been fulfilled. It may subsequently turn out that the Husband signed both names to the engagement letter, the e-file authorizations, or the opt-out forms. However, it is not the tax preparer’s function to do a handwriting analysis. If the Husband did sign both names the legal situation then changes to an area beyond the scope of this article.

Submitted by:
I. Jay Safier, CPA, CGMA, CFF