A recent U.S. Tax Court case highlights why even when the divorce decree says you win, the Tax Court/IRS will say you lose. In Schenk v. Commissioner, 140 T.C. No. 10 (2013), http://ustaxcourt.gov/InOpHistoric/ShenkDivGustafson.TC.WPD.pdf, the Tax Court details the often common problem that divorced filers face when they file their federal tax return. In this case, the mother and custodial parent filed a tax return claiming a child that was later claimed by the father on his return. The IRS issued the father a notice of deficiency regarding non-reported income and removing a dependent that had previously been claimed by the mother. The father challenged the deficiency by arguing that according to the divorce decree he was entitled to claim the child.
Ultimately, the Tax Court read the language of the divorce decree as being ambiguous as to who had the right to claim the deductions. And, bolstered their arguments by referencing the requirements of Section 152 of the Internal Revenue Code. The Tax Court analyzed the legislative history of Section 152 and the technical elements of the section, to place the burden of clarity on taxpayers to prove their right to claim a dependent. In this matter, Mr. Schenk failed to have his ex-spouse execute a Form 8332 or similar declaration. The Tax Court made mention that the divorce decree does not demand execution of the Form 8332, and the divorce decree would not be a sufficient substitute for the form.
Unfortunately, as a tax attorney I have too many clients come to my office who have had the IRS propose similar adjustments as Mr. Schenk experienced. The tax benefits that accompany claiming a dependent, from Head-of-Household filing, extra exemptions, and associated tax credits, often times cause former spouses to race to get their return filed before the other has the opportunity. This case illustrates the potential great burden that a spouse can face in proving their right to claim a dependent if a divorce decree is not properly drafted. If you are currently going through a divorce you should request your attorney review with you in detail the tax implications of the divorce, including the downstream effects of being able to claim dependents. Should you still have concerns, you should feel free to consult with a tax attorney.