Tax returns are a record of an individual’s income that are presented to the United States federal government. If the tax returns are not complete and factual, the filer can face a myriad of penalties and possible criminal prosecution. So, tax returns are an extremely reliable source of information in an Illinois divorce. Understanding a tax return is something that every divorce litigant and divorce attorney needs to be familiar with.
One of the first things to happen in an Illinois divorce is the exchange of initial financial documents. The first initial financial document is the financial affidavit.
In Cook County, Illinois, “The Petitioner shall serve the completed “Financial Affidavit” not later than thirty (30) days after service of the initial pleading and the Respondent shall serve the completed “Financial Affidavit” not later than thirty (30) days after the filing of the Responding party’s appearance.” Cook County Court Rule 13.3.1
While the litigants fill out the financial affidavit, the numbers on the financial affidavit must be based on something. The basis of those numbers have to be attached to the financial affidavit.
“The financial affidavit shall be supported by documentary evidence including, but not limited to, income tax returns, pay stubs, and banking statements.” 750 ILCS 5/501(a)(1)
The tax return is largely the most informative supporting document. Just like the financial affidavit, the tax returns numbers are based on something beyond the tax return. Anyone going through a divorce must do their due diligence and ask the for the documents that the accountant used to prepare the tax return. This article will show you exactly what to ask for based on the tendered tax return.
Unless your spouse is willing to lie to his or her accountant and that accountant is willing to risk their own license by not verifying your spouse’s income, the tax return will reveal your spouse’s true financial situation.
The 1040 Tax Return
The 1040 Tax Return form is the tax return used for Individuals in the United States. Every individual who is generating over $ 12,250 in income must file a 1040 (or type of 1040) Tax Return form.
Every year the 1040 changes. As I explain what to look for, I’ll use one of the longest of the 1040s, the 2017 version. 2017 1040 also applies the Tax Cuts and Jobs Act of 2017. A sample is posted below for reference.
If you filed your taxes as “Married Filing Jointly” you’ll already have a copy of your tax returns. Othewise, you’ll need a copy from your spouse.
Let’s work through every line on the first two pages of a 1040 tax return to find anything that could be relevant in a divorce.
Line 7 will indicate any wages the party is collecting which are not self-employment. If there is a number in this line, you need to ask for your spouse’s W-2 form which was provided to them by their employer.
Line 8 is interest income. If there is interest income, there are assets from which that interest income is coming. Documentation about those assets need to be requested. These assets may be listed later in the tax return on Schedule B.
Line 9 is dividend income. If there are dividends, there are stocks which generate these dividends. Documentation about those stocks must be requested. The stocks may be listed in Schedule B later in the tax return.
Line 11 Alimony. If either spouse is collecting alimony and this line is populated, something extremely strange has happened. The alimony must be from a pre-2018 divorce. If it’s not your divorce and you’re married to someone else, that alimony should have been cancelled by the new marriage.
Line 12 Business income Or Loss. If there’s business income, there must be a business and documents related to that business must be requested. Schedule C of the tax return will reveal much about the income from this business.
Line 13 Gains and Losses. If there was a gain or loss, then an asset was sold. Documents about these assets must be requested. Schedule D of the tax return will tell us more about these assets and their sale
Line 18 Farm Income. If there’s farm income, there’s a farm. Documents relating to that farm must be requested. Schedule F (for farm?) will provide more detail.
Line 21 Other Income. If there’s a number here, it must have come from a strange source like gambling winnings which you must inquire into.
Line 26 Moving Expenses. If there is a moving expense, there is a new household. Inquiries must be made to determine if the new household was purchased or rented.
Line 28 Self-Employed SEP, Simple, And Qualified Plans. If income is being deferred from being taxable because it is being put into a tax-deferred account, then you must ask for a copy of that tax-deferred account.
Line 30: Early Withdrawal Penalty. If money was taken out of a retirement account early, there will be a penalty paid to the IRS. What happened to that money? Was it spent for a marital purpose? If not, it is likely dissipation of marital assets.
Line 31. Alimony Paid. For divorces finalized in 2019 or later, alimony (known as maintenance in Illinois) paid must be included in the tax return. Double check to see if the amount listed is the alimony you are receiving.
Line 32 IRA Deduction. If there’s an individual retirement account deduction, there must be an individual retirement account. That account’s balance and statement must be requested.
Line 33 Student Loan Interest Deduction. A student loan interest deduction may indicate marital debts in the form of a student loan. It is debatable if you would want to inquire into these as it may alert your spouse that you could be responsible for some portion of that debt.
Line 48 Foreign Tax Credit. If someone is declaring a foreign tax credit, they have a foreign account which is being taxed. Records of those foreign accounts must be requested from your spouse. Subpoenas from a United States’ divorce lawyer have little power overseas.
Line 50 Education Credits. An education credit could be for the filer, themselves. Inquire into what kind of education is being pursued as it could reduce alimony.
Line 51 Retirement Savings Contributions. Retirement savings credits means there is a retirement savings account which must be requested.
Line 53 Residential Energy Credit. A residential energy credit indicates that there is a residence. Documents relating to that residence must be requested.
Line 57 Self-Employment Tax. Self-employment tax is a separate tax which is calculated in form 1040SE. Where there is extra tax, there is extra income and records of that income must be requested.
Line 58 Unreported Social Security And Medicare Tax. If the spouse’s employer did not pay the spouse’s social security and medicare tax, then the spouse, themselves must pay the tax. This means there is additional income which may not have been reported (it’s usually a restaurant worker’s tips). Additionally, some professions, like railroad workers, don’t pay into Social Security and will have to pay Social Security taxes independently under certain circumstances. This additional income can impact an alimony or child support award.
Line 59 Additional Tax on IRAs, Other Qualified Retirement Plans. Tax-deferred accounts eventually get taxed if the spouse is old enough. If taxes are being paid on a retirement account, then documents regarding the retirement account must be requested.
Line 60a Household Employment Taxes. If there are in-home employees, this is likely an expense related to children (there are more nannies than butlers) which will be shared by both parties. The expenses should be verified as taxable expenses are likely minimized.
Line 60b First-time Homebuyer Credit Repayment. The payor of this credit must have a home. Documents related to this home and its purchase must be requested.
Line 61: Health Care: Individual Responsibility. This is largely related to the Affordable Health Care Act. A person may be concerned that their spouse is underinsured as they would be responsible for part of the balance on any health care expenses until the divorce is finalized.
Line 67 Additional Child Tax Credit. Tax credits based on children can be allocated by an Illinois divorce court either currently or retroactively. Request all evidence of all tax credits requested by your spouse.
Line 68 American Opportunity Credit. Anyone who takes this credit has made a significant credit into an American Opportunity Zone. This is almost always real estate. Documents relate to this real estate must be requested.
Line 75 Refund. Is your spouse in possession of a refund? Inquire as to where that refund went.
Line 78 Amount you owe. What is the total tax liability your spouse owes to the IRS? You must inquire as you probably owe a portion of that tax liability with them. Tax liabilities are marital liabilities and will be divided equitably by an Illinois divorce court.
That is just the first two pages of an Individual Tax Return! A 1040 Tax Return form tells you a lot but mostly an Individual Tax Return just tells you the questions you need to ask.
How To Request All These Documents
Once you’ve outlined all the documents you need from just the first two pages of your spouse’s tax return, you need to request those documents from your spouse.
The documents can be requested from your spouse directly via a Notice To Produce. A Notice To Produce is a laundry list of documents you believe the opposing party has in their possession or control and a request for copies of those documents.
“Any party may by written request direct any other party to produce for inspection, copying, reproduction photographing, testing or sampling specified documents, including electronically stored information….The request shall specify a reasonable time” Ill. Sup. Ct. R. 216(b)
If your spouse does, in fact, have the documents, they must tender copies to you in a timely manner. The accountant who prepared the 1040 Individual Tax Return for your spouse didn’t just get these numbers out of thin air. Your spouse gave the accountant these documents. Presumably, your spouse still has the documents or can ask the accountant for the documents.
If your spouse does not produce what you’ve requested “sanction[s]…may be imposed against a party where the document or thing requested was in his possession or was within his power to produce.” Hawkins v. Wiggins, 415 NE 2d 1179 – Ill: Appellate Court, 1st Dist. 1980
Furthermore, taxpayers always have the right to request directly their tax returns and the attached supporting documents directly from the IRS. 26 U.S.C. §§ 6103 (e)(1)(A)(i), 6103(p)(2)(A). So, there is no excuse to not turn these supporting documents over during a divorce.
Attorneys can issue subpoenas which are essentially commands to produce documents which have the force of law.
“[S]ubpoenas may be issued by an attorney admitted to practice in the State of Illinois who is currently counsel of record in the pending action. The subpoena may command the person to whom it is directed to produce documents or tangible things which constitute or contain evidence relating to any of the matters within the scope of the examination permitted under these rules” Ill. Sup. Ct. R. 204(a)(1)
Of course, there’s little use in sending out a subpoena if all you know is that your spouse generated income…but you don’t know the source of that income.
“Any party may take the testimony of any party or person by deposition upon oral examination or written questions for the purpose of discovery or for use as evidence in the action.” Illinois Supreme Court Rule 202
Not surprisingly, upon receipt of a Notice of Deposition, the documents suddenly become available so long as the deposition will be excused upon production of said documents.
“The notice, order or stipulation to take a deposition may specify that the appearance of the deponent is excused, and that no deposition will be taken, if copies of specified documents or tangible things are served on the party or attorney requesting the same by a date certain.” Ill. Sup. Ct. R. 204(a)(4)
For 90% of Illinois divorces, the two first pages of a 1040 Individual Tax Return and the supporting documents will tell you everything you need to know about your spouse’s assets and income.
For the other 10% of Illinois divorces, we need to dig into the Schedules attached to the 1040, which I will do in subsequent articles.
Most lawyers say that if they liked math, they’d be a doctor. That’s a cop out. If you’re dealing with money, you’re dealing with math. You cannot divorce someone with asset or income issues unless you’re comfortable with numbers.