Tax returns in an Illinois divorce

Russell Knight

Russell D. Knight has been practicing family law as a Chicago divorce lawyer since 2006. Russell D. Knight amicably resolves tough cases while remaining a strong advocate for his client’s interests.

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Reading Your Spouse’s Tax Returns In An Illinois Divorce

Tax returns in an Illinois divorce

A divorce is the untangling of two people’s lives, personally and professionally. It is not uncommon for one spouse to hold a monopoly on the parties’ financial information.

Tax returns will reveal almost all of a party’s income and assets that generate income (which everything outside of precious metals).

Assets are important in an Illinois divorce because Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions” 750 ILCS 5/503(d)

Income is important in an Illinois divorce because “The court shall compute the basic child support obligation by…determin[ing] each parent’s monthly net income” 750 ILCS 5050(a)(1.5)

Income also determines maintenance, formerly known as alimony, in an Illinois divorce. Maintenance “shall be calculated by taking 33 1/3% of the payor’s net annual income minus 25% of the payee’s net annual income. The amount calculated as maintenance, however, when added to the net income of the payee, shall not result in the payee receiving an amount that is in excess of 40% of the combined net income of the parties.” 750 ILCS 5/504(b-1)(1)(A)

You have to know your spouse’s assets and income if you want a fair divorce. Your spouse may not want to tell you their true assets and income, so you’ll have to double check yourself using their tax returns.

How To Get A Copy Of Your Spouse’s Tax Returns In An Illinois Divorce?

Financial information can be requested via discovery. The first step is requesting a financial affidavit which summarizes the party’s financial situation.

A party to an Illinois divorce swears under penalty that the information on the financial financial affidavit is true. The financial affidavit closes with “I certify that everything in the Financial Affidavit is true and correct. I understand that making a false statement on this form is perjury and has penalties provided by law under 735 ILCS 5/1-109”

Despite this attestation of veracity, the financial affidavit should be seen as a checklist. Each item on the financial affidavit should be reviewed for accuracy, if possible. The accuracy can be verified other documents which duplicate the same information.

The Financial Affidavit should be accompanied by documents which support the assertions made in the financial affidavit. Those supporting documents are often tax forms.

“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)

A tax return is a form on which a taxpayer makes an annual statement of income and personal circumstances, used by the tax authorities to assess liability for tax. There are a variety of income tax returns in Illinois and the United States in general. A well-meaning spouse would include all of the tax returns for inspection, including those tax returns supporting documents.

Unfortunately, not all divorcing spouses are as well-meaning as they should be. Therefore, you must ask for tax documents with specificity via a notice to produce.

An Illinois Notice To Produce can include requests such as the following:

“Personal or Joint Income Tax Returns:

Copies of state and federal income tax returns filed by you or on your behalf, including all schedules, 1099 Forms, and W-2 Forms, received from any employer(s) during said period, including all amended returns and Statements of Assets and Liabilities.  For the present year and for the three (3) previous years, if the tax return is not prepared, attach copies of present or estimated tax declarations for said years.

Business Tax Returns:

Provide complete copies of the federal and state tax returns filed by your business, partnership, joint venture, corporation or other entity.

Interest in Partnerships:

For each interest you have in a partnership, provide the following:

  1. Partnership agreement; amendments, revisions or additions thereto;
  2. Partnership income tax returns filed; K-1  income tax forms filed”

Why Tax Returns Are So Important In An Illinois Divorce?

The reason that tax returns are so valuable in a divorce is that they are reliable. Tax returns are reliable because tax returns are signed under the penalty of perjury.

Every tax form has the following language: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.”

This penalty of perjury is no joke for federal tax forms.

“Any person who—

(1)Declaration under penalties of perjury

Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter

shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution.” 26 U.S. Code § 7206

Furthermore, no one who makes real money does their own taxes (it’s very difficult to excel at two different specialties…that’s why I only do divorce). Any tax preparer faces the same penalty for preparing a false tax return

“Any person who-

Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document… shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution.” 26 U.S. Code § 7206

No accountant is going to risk 3 years in prison to save their client a few thousand dollars. So, essentially, all tax returns are double verified by the spouse who signed the tax returns and the accountant who prepared the tax returns.

Form 1040 In An Illinois Divorce

The most important tax return to review is your spouse’s personal tax return, the Form 1040. All of the other tax returns should support the Form 1040. So, just as the financial affidavit is your first stop in determining your spouse’s assets, debts and income, Form 1040 will also be the first supporting document to examine.

Form 1040 has numerous lines which describe numerous sources of income.

Wages (line 1)

Interest & Dividends (lines 2 and 3 and Sch. B)

Capital Gains (line 7 and Sch. D)

Other Income (line 8 and Sch.1)

Illinois almost always looks at “net income” so whatever income has been earned, some taxes may have already been paid and other taxes are likely to be owed.

Total Taxes Owed (line 12b)

Total Taxes Paid (lines 15 through 18)

Any Tax Overpayment (line 20)

Any Tax Due (line 23)

Form 1040 has additional forms which supplement and explain where the numbers in Form 1040 came from.

Schedule 1 (Form 1040) contains most of the additional income sources.

Alimony Paid/Received (lines 2 or 18)

Business Income (line 3 and Sch. C)

Gambling Income (usually line 8)

Business income (line 5 and Sch. E)

Self Employment Tax Deductions (line16)

Retirement plan contributions (lines 15and 19)

Schedule 2 (Form 1040) contains any additional taxes which should reduce net income.

Self Employment Tax (line 4)

Net Investment Income Tax (line 8)

Schedule 3 (Form 1040) contains additional tax credits and payments which would subsequently reduce the taxes owed in Schedule 2.

Foreign Tax Credits (line 1)

Tax payment made with extension(line 9)

These numbered schedules are further supplemented by the letter schedules (A-E) which further explain sources of income.

Schedule A lists the itemized deductions which show you how your spouse is spending their money by listing the spending that is tax deductible.

Those deductible items include, state and local taxes, real estate taxes, mortgage interest, medical expenses and charitable contributions

Schedule B lists the interest payments and dividends your spouse is receiving. You cannot have an interest payment or dividend without an underlying asset such as a bank account, brokerage account or a note receivables

Schedule C lists the profit and loss from a business. Obviously, a profit or loss from a business means an ownership interest in that business and that business’s assets.

Schedule D lists the capital gains and losses from the sale of assets. After the sale of an asset, the proceeds must be somewhere and must be disclosed.

Schedule E lists supplemental income from investments such as rental real estate, partnerships and S-Corporations, estates and trusts. All of these business file their own tax returns which must be requested and analyzed by the curious divorcing spouse.

Corporate Tax Returns In An Illinois Divorce

Corporate tax returns net income to a spouse should be listed in Schedule E. But there are often items on a corporate tax return which look a lot like income in a divorce but, for tax purposes are not.

Form 1120, U.S. Corporation Tax Return, lines 11-27 lists expenses which could directly benefit a divorcing spouse and be considered income for divorce purposes but not income for tax purposes.

If any of these deductions reflect a non-business benefit to a party to an Illinois divorce, the “income should be imputed to the…personal income because the record contains [an] indication that…these payments were reasonable and necessary expenditures for the production of income.” In re Marriage of Heil, 599 NE 2d 168 – Ill: Appellate Court, 5th Dist. 1992

S-corporations are a little simpler and their deductions are lines 7-21 on Form 1120s, U.S. Income Tax Return For An S Corporation.

Form 1065, U.S. Return Of Partnership Income, likewise has lines 10-20 which indicate expenses that could be forms of income for a divorcing spouse if not for a pure business purpose.

How does a spouse determine if these deductible expenses were actually the payment of personal expenses? Request the general ledger of the corporation or partnership via subpoena. A general ledger is a record of all of a company or partnership’s transactions.

The perks your spouse receives (and should share with you) will be in the general ledger.

What If There Is No Tax Return In An Illinois Divorce?

If there’s no tax return available to help verify a party to an Illinois divorce’s income and assets, then there will still likely be documents that most tax returns are based upon.

Every employee is issued a W2 which specify what wages, tips, other compensation that employee received. Additionally, a W2 will have Social Security Wages vs. Medicare Wages, the Taxes Withheld, any contributions to an Employer Retirement Plan or 401(k) Contributions and list all Employer Paid Health Insurance.

Every member of a partnership is issued a K-1 schedule which will contain lots of useful information such as what percentage of the partnership the person owns and how much money they received from or contributed to the partnership that year.

For other sources of income, there are a variety of 1099s which a person may receive that will confirm their income and assets.

1099-INT is issued by anyone who paid interest in excess of $ 10. Interest means there is an account of assets somewhere.

1099-DIV is issued by anyone who issued a dividend in excess of $ 10. Dividends means there is an account of stocks somewhere.

1099-R is used by anyone who distributes in excess of $ 10 from annuities, profit-sharing plans, retirement plans, IRAs, insurance contracts, or pensions. A 1099-R means there is retirement income which means there are retirement assets.

Not every 1099 will reveal an income paying asset. Some 1099s just reveal income.

1099-MISC is for any time anyone was paid more than $ 600 for anything. This is usually the sale of goods or labor.

1099-NEC is very similar as it is specifically to reflect payment of non-employee labor in excess of $ 600.

1099-R is for certain government benefits like unemployment.

Beyond these tax documents are simply a divorce litigant’s paystub. A paystub shows a person’s income and should be followed by the question “where do you deposit this income?” That bank account where the income is deposited should then be scrutinized for deposits from all sources. Those sources are either income, assets or both income and assets.

What If My Spouse Earns Cash In My Illinois Divorce?

It is unfortunate but it is almost impossible to trace cash unless there is a receipt for said cash earnings or there are cash purchases which can be quantified.

No one is going to provide a cash receipt because they are complicit in hiding the cash from possible taxes.

Purchases in cash require evidence of the purchase. Most cash purchases end up being consumed as food, alcohol, gas or services.

If you’re unwinding your marriage and trying to determine what your spouse really makes and owns, contact my Chicago, Illinois family law firm for a free consultation with an experienced Chicago divorce lawyer.