Make sure you update the IRS and state on amount you receive at close or you could be audited and fined!

 

Last year I sold a listing in Sexton Mountain neighborhood that was being sold because of a divorce. Now, the fact that it was a divorce is partially what lead to the problem that I got the call on today. You see this couple had equity in their home, they had owned their home 23 years and had never refinanced, so they really weren’t hit by the local slide in real estate sales prices.

Well, at close all the proceeds went in to an escrow account for them to fight it out in court who got what and for how much. (You see besides the house, they were also fighting over everything including the lawn furniture. But, despite that battle title had to issue each of them a 1099 stating at the time of close as far as title was concerned it was all being split 50/50 and that is what each 1099 would show.

At the closing table they were told by me and then again by the escrow officer that since this was going in to an escrow account with the lawyers and when it finally goes to court that it may not end up a 50/50 situation, they would in the end need to report the correct amount to the IRS or they could be over or under billed for the 2009 tax year.

Well, here it is May 2010 and I get a call from the ex-wife stating she is being audited because the amount she reported she got is different than what they feel she owed on. You see, she took the 1099 issued by the title company and turned that in with her taxes, which normally would have been the correct thing to do. The only problem is that in the divorce trial she ended up with 83% of the assists from the house which ended up giving her a bigger tax burden.

Now, this wouldn’t have been so bad, but the husband when he filed his taxes as a single person for 2009, he used the updated amount and the ex-wife filled using the old amount. (Basically shorting the government on what they were owed) An honest mistake, but not one the government tends to over look or understand when you try to explain it to them.

Unfortunately, she will end up with not only an additional amount of tax owed, but she is will also be being hit with additional interest and penalties of course.  So, if you are in a situation that the money from the sale of your house is being split, make sure that any changes in that split are reported to the IRS or you to could find yourself in the IRS office writing a big check if they catch it like they did here.

 

Todd Clark - Broker / Sales Coach
All Brokers Real Estate
Phone: (503)524-9494
Fax: (503)622-8739

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©2010 Todd Clark - Make sure you update the IRS and state on amount you receive at close or you could be audited and fined!