I have a tax issue that I hope you can help me with. A few years ago my wife and I got divorced. After the divorce I continued to use the same tax person. It is the same tax person my ex also uses. This year I decided to make a change. My new tax person tells me that the old one made a few mistakes on my return. Basically, the mistakes deal with my children. Under the terms of the divorce settlement I got custody of the kids and according to the settlement, was entitled to all the deductions for them. It appears that since the divorce the tax person has been giving all the deductions to my ex. My new tax person recommended that I file amended returns. He tells me with the deductions and the credit I should receive at least a $5,000 refund for each year the mistake was made. The money is significant but at the same time, I don’t want to screw my ex-wife. My first question to you is if I file an amended return, which I want to do, what, if any, would be the consequences to her? My second question is do you think my old tax preparer has some responsibility?
Joe

 
In your situation it is more likely than not that after you file your amended return the IRS will be contacting your ex-spouse. Based upon the fact that you are the one who supports your children and that the divorce settlement gives you the deductions, the IRS will deny the exemptions she claimed on her tax return. The result will be that she will owe money to the IRS and based upon the tax owed, they will also assess her interest and more likely than not, issue a penalty. While she has an opportunity to get the penalty waived, that is not a certainty. In many cases the IRS will waive penalties and other cases they will not.

I am frequently asked when it makes sense to file an amended return. My view has always been that if the mistake results in you owing additional taxes, it makes sense to file an amended return. After all, it is much easier to deal with the IRS and penalties if you voluntarily come forth as opposed to them catching you. On the other hand, when the mistake is in your favor, I generally will tell the taxpayer to file an amended return if the dollar amounts are material. If for example there was a mistake and the result is you would get less than $100 back from the IRS, I would probably tell you that it’s not worth the time and the cost to file an amended return. On the other hand, if the dollar amounts are material and you have the necessary documentation, then I’d say it makes sense to file an amended return. In the situation at hand where we’re talking thousands and thousands of dollars, it certainly makes sense to do the amended return.

I recognize in the situation at hand that there’s the other side of the equation. Whatever you save is going to be assessed against your ex-wife. Since you are concerned about her, I would recommend giving her a heads up as to what you’re doing and thus, it gives her an opportunity to file an amended return on her own. If she files an amended return, yes she would still be liable for the taxes and interest, but she has a much better chance of avoiding any penalties.

With regard to your old tax preparer, if they made an honest mistake, I would think they should be liable to pay your costs to prepare the amended return. In addition, because you can only file an amended return for three years after you filed the original return, if you find that the statute of limitation prevents you from filing an amended return for a particular year when they make a mistake, then it may be appropriate to seek additional monies for the lost deductions. On the other hand, if it was not an honest mistake but rather, an attempt to benefit your ex-spouse, then in addition to seeking compensation for your costs and for any additional taxes you had to pay for the years you couldn’t amend your return, I’d also consider other actions such as filing a grievance with the appropriate regulatory authorities.

One last note and that is don’t forget that when you amend your federal return, it may result in you needing to also amend your state return. In your particular situation, by amending your state return, I think you’ll find that you’re also entitled to a refund from the State of Michigan.

Good luck!
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.