Tax season is often a stressful time of year, but for those considering divorce, it can also expose some financial red flags. Reviewing tax returns and financial records before divorce can reveal hidden income, suspicious deductions, or inconsistencies that could impact alimony, property division, and child support.
How Taxes and Divorce Can Uncover Financial Irregularities
When filing taxes, individuals must report income, deductions, assets, and liabilities. These financial disclosures provide a snapshot of a household’s financial situation and can highlight irregularities that might otherwise go unnoticed. Before divorce, reviewing tax returns can help uncover:
- Undisclosed Income – Spouses sometimes under report earnings to minimize alimony or child support obligations during taxes and divorce.
- Hidden Assets – Tax records can reveal interest, dividends, or rental income from previously unknown accounts.
- Questionable Deductions – Unexplained business expenses or unusual write-offs could indicate financial dishonesty.
- Overpayment or Underpayment of Taxes – A spouse may manipulate tax payments to impact financial settlements during taxes and divorce.
While examining tax returns before divorce, you can gain further insight into your finances and prepare for negotiations related to taxes and divorce.
Common Financial Red Flags in Tax Returns
Tax records often reveal financial details that could influence your divorce settlement. Here are some warning signs to look for before divorce:
1. Sudden Drop in Income
If your spouse’s reported income has significantly decreased, it may indicate they are hiding earnings or deferring bonuses to reduce their alimony obligation. Compare W-2s, 1099s, and past tax returns for discrepancies.
2. Unexplained Business Deductions
If your spouse is self-employed, they may claim excessive business deductions to lower their taxable income. Look for inflated expenses such as:
- Personal purchases disguised as business expenses
- Large, unexplained write-offs
- Loans to family or friends that reduce reported income
3. Discrepancies in Investment and Retirement Accounts
Tax documents such as 1099-INT or 1099-DIV forms list interest and dividends from bank accounts and investments. If you were unaware of certain accounts or investments, your spouse may be attempting to conceal assets before divorce proceedings.
4. Large Charitable Contributions
While charitable donations are tax-deductible, excessive contributions could be a way to reduce taxable income or funnel money elsewhere. Review itemized deductions when going through your taxes and divorce for any unusual donation patterns.
5. Dependents and Filing Status Changes
Claiming dependents incorrectly or changing filing status can impact tax liabilities. If your spouse suddenly claims a dependent they previously did not, it could be an attempt to gain a financial advantage.
How Tax Records Impact Alimony and Divorce Settlements
Understanding your spouse’s tax filings is important before a divorce, especially when determining alimony. Courts consider income, deductions, and assets when calculating support payments. Here’s how taxes and divorce intersect when it comes to alimony:
- Income Reporting – Alimony payments are determined based on each spouse’s income, so accurate reporting is important.
- Deductions and Expenses – Unusual deductions could falsely reduce a spouse’s taxable income, affecting support calculations.
- Tax Implications of Alimony – For divorces finalized after 2018, alimony is no longer tax-deductible for the payor or taxable for the recipient. Knowing this rule can prevent financial miscalculations.
Before divorce, reviewing tax documents with a Colorado divorce attorney and/or a forensic accountant can help make sure that financial disclosures are accurate and fair.
Steps to Take Before Filing for Divorce in Colorado
If tax records raise financial concerns, taking proactive steps before divorce can help protect you:
- Request Copies of Tax Returns – Obtain at least three years of federal and state tax returns.
- Review W-2s, 1099s, and Business Filings – Compare reported income with actual earnings.
- Examine Bank and Investment Statements – Look for undisclosed accounts or assets.
- Consult a Colorado Divorce Attorney – A legal professional can help interpret financial records and identify potential concerns.
- Consider a Forensic Accountant – If you suspect financial fraud, a forensic accountant can analyze records for discrepancies.
Protect Your Finances Before Divorce Begins
Tax season isn’t just about filing returns—it’s a valuable window into your household finances. Reviewing tax documents closely can uncover hidden assets, unreported income, or financial inconsistencies that may affect the outcome of your divorce. Identifying these issues early on can make all the difference in how alimony, property division, and support are determined.
Working with a skilled divorce attorney can help you spot these warning signs and position yourself for a fair resolution. If you’re preparing for divorce in Colorado and have concerns about your taxes and divorce, contact Colorado Legal Group today to schedule a consultation.