Another Divorcing Couple...Ethical Decision

[MsTabbyKats]

Just want to get some feedback:

Here's the story (and this has nothing to do with foreign income, excluded income, circulars, publications etc)

I got a call from a woman yesterday. Her name is Jane Smith. She said John Doe referred her.

Her story: Lived in US for a few months....started "a business" (got tax ID#).....made $0 but had expenses....then moved "back home" (another country) and is not planning to return here.

I told her the return would just have a negative number....when she asked about "her refund". Then I explained that if she had other income, it would reduce that...but there was nothing to reduce.

So...she said..."but last year we got.....". Huh...last year????? It turns out that she is married to John Doe, and I did their return. (His name was familiar...I didn't recognize hers.).

Last year (2012) they had moved to the US. He had a work visa...she didn't. For the half of the year he made about $60,000....and they got a huge refund.

More of the story....they are divorcing. It sounded as if this is a chapter of her life she'd like to forget. It's not a bitter divorce...but she doesn't want to bother with him. The divorce may or may not be final by 12/31.

So...I explained to her...that if they aren't divorced...they are entitled to file a joint return....and the fact that she has a loss (besides the extra exemption and joint deduction) would mean several thousand dollars less tax to him,

She was vague after that...and said she probably would prefer to file separately....and she wants to do it NOW or asap.

Obviously I'm not going to "tell on her"......but this whole thing is making me feel like I should really try to convince her to do a joint return.

Then again....I don't know the reasons for the divorce and I should probably mind my own business. (For all I know, since she won't get a refund, she may decide not to bother filing....and he may do his own return or go with another preparer.)

[Guest Taxed]

>>> So...she said..."but last year we got.....". Huh...last year????? It turns out that she is married to John Doe, and I did their return. (His name was familiar...I didn't recognize hers.).

Some thing about this situation is very strange. It appears you did their MFJ last year. But then you did not recognize this lady.

What is her husband's side of the story.

If they are still legally married on 12/31 then the two options are MFJ or MFS, explain to them what the basic difference is and let them decide how they want to go for 2013. I would stay completely away from being sucked into their fight. I have been there and not pretty. If you find the husband more responsive, and they want to go MFS you could just do the engagement with his return, since she is out of the country and chances of her to stiff you are high.

[MsTabbyKats]

I did the return. But, when I spoke to her...her name didn't stand out. They were "first timers". I checked my records; she was there.

So far, in 20 years, I've only been "stiffed" once....and that was by an American in CA. I'm not concerned about that at all.

I'm not going to ask him his side of the story or anything like that right now.

If she contacts me again...I'll repeat that he's better off if they file joint. But...should I really reinforce "by how much"?

If he contacts me before she does....I'll let him know I was in touch with her....and that they should discuss whatever. At that point I'll tell him that he would be better off to file jointly...but not by "how much".

I just feel kind of bad....because he'd be paying a lot more as a MFS.

I'm using this more as a sounding board.....just want feedback as to what people think my involvement should be, if any.

I got the impression that they aren't hostile towards each other....but just wanted to put a really short marriage "in the past".

[Guest Taxed]

Correct. When you explain MFJ/MFS you can tell that generally MFJ gets you a lower overall tax (higher refund). But now that yu know they are divorcing I would NOT get into actual numbers unless you have consent from both spouses. That is what i mean getting sucked into their fight.

Since you mentioned they are not hostile, there is a good chance they will want to work with you to get the best tax result.

Also you mention work visa, is this another 1040NR deal??

[MsTabbyKats]

Correct. When you explain MFJ/MFS you can tell that generally MFJ gets you a lower overall tax (higher refund). But now that yu know they are divorcing I would NOT get into actual numbers unless you have consent from both spouses. That is what i mean getting sucked into their fight.

Since you mentioned they are not hostile, there is a good chance they will want to work with you to get the best tax result.

Also you mention work visa, is this another 1040NR deal??

No...they aren't non-resident aliens for tax purposes. They file the regular 1040.

As far as being "stiffed"......it's really funny....but that's never happened.

And I've had clients that live on tiny islands in the middle of nowhere....and they know they won't ever need my services again.

Sadly....I think "stiffing" is more of an American thing....because in other countries there are penalties for "stiffing" someone, or giving a check that bounces. I know as a fact, that in the country from where these people come from...bouncing a check can lead to jail.

[Lion EA]

When couples are divorcing, I explain MFJ vs MFS. But, there are many reasons for filing MFS that have nothing to do with taxes, such as keeping her finances separate or filing before the soon-to-be-ex is ready or not being held jointly liable when you aren't together anymore to know/understand the other's finances. It's her decision after you inform her. Or his, is that's the client you keep. And, no, you cannot tell her or him "by how much" unless they both engage you to contrast MFJ vs. MFS for them.

I prefer to keep only one of a divorcing couple if they decide not to file MFJ.

[Guest Taxed]

Very sound advice Lion.

[kcjenkins]

She was vague after that...and said she probably would prefer to file separately....and she wants to do it NOW or asap.

Clearly, she can not "do it now", and I think all you should tell her is that if she does not want to file with him she has no reason to file at all IF in fact, the business was truly just her business. I'd wonder though, if the husband, as the only earner in the family, did not fund the business and consider himself at least a part-owner, and want to take the loss. That's the thing about small Sch C businesses in a family, often there can be 'ownership issues' if they split up.

And we are ASSUMING here that it was a Sch C.

[MsTabbyKats]

Clearly, she can not "do it now", and I think all you should tell her is that if she does not want to file with him she has no reason to file at all IF in fact, the business was truly just her business. I'd wonder though, if the husband, as the only earner in the family, did not fund the business and consider himself at least a part-owner, and want to take the loss. That's the thing about small Sch C businesses in a family, often there can be 'ownership issues' if they split up.

And we are ASSUMING here that it was a Sch C.

Interesting point....about who funded "the business".

[Guest Taxed]

Interesting point....about who funded "the business".

Does it even matter now. Whose ss# was on the Sch C? As far as IRS is concerned that is the sole prop.

[kcjenkins]

Taxed, as I understand it, no Sch C has yet been filed. New business, remember, were not together very long. First step would be to get a copy of the EIN application.

[Guest Taxed]

May be I misunderstood. I thought OP said she did their joint return last year but did not remember when the woman called her??

[MsTabbyKats]

May be I misunderstood. I thought OP said she did their joint return last year but did not remember when the woman called her??

No...you didn't misunderstand.

When she called me (yesterday) I didn't recognize her name and thought it was a potential new client. She told me "someone referred her". She didn't say "my husband referred me to you". His name was familiar. Then, in conversation, she mentioned the large refund last year....and said I did the return. I looked it up...and sure enuf.....MFJ.

Realistically, being that she isn't getting any refund (but had anticipated one based on last year), lives 10,000 miles away, is never coming back, and I do charge a fee....I'll probably never here from her. She bought maybe $2000 worth of costume jewelry...and sold $0. She thought that she would recoup the $2000. So, I explained "how things work".

If the husband contacts me, and they're still legally married.....I'll just suggest he file jointly and he should discuss with the wife. No $$$ will be mentioned.

I have a habit of thinking of "these kids" as "my kids"....and get subjective. Bad habit....!

[Pacun]

Rotten inventory?

[JohnH]

Don't you just love it when that occasional client thinks they're going to get the entire amount back in tax refunds when they lose money in a business venture? But that same person would never assume they have to pay the entire profit in taxes if the business made money.

[Cathy]

I'd put this one on the back burner because they may or may not be divorced by 12-31-13.

At the moment, you can't file a return for 2013 for her anyway. Once the year has ended and the couple's marital status is determined, it will be a lot easier to make a decision as to your involvement (or lack thereof) with their tax preparation.

Take care,

Cathy