Welcome And Meet Lucy Petri

SPEAKER_00 0:01

Welcome back to the Texas Family Lawyer Podcast. My name is Alex Hunt. I am managing attorney at Hunt Law Firm serving the greater Houston area. I am very excited today to be joined by Lucy Petri, a tax attorney here in the Houston area. We're going to be talking about all of the questions that you might have that are at the intersection of family law and tax law, and we see these areas intersect all the time. Lucy, thanks so much for joining me.

SPEAKER_01 0:30

Thank you, Alex, for having me.

SPEAKER_00 0:32

So introduce yourself to the audience a bit. We have worked together on several cases now. Tell me how what's your origin story? Tell me, tell us a little bit about your background.

SPEAKER_01 0:44

Yeah, so I am dually licensed as a CPA and as an attorney. I have worked in a public accounting. I have managed uh the finances as a controller for a publicly traded corporation. Um I have been a professor of tax. Basically, everything related to tax, uh, I have done. I really enjoy um taxation is like a puzzle to me. I'm originally from Brazil, grew up in Brazil. I speak Portuguese as my first language, but here in Texas I learned uh Spanish as well, uh watching novellas. Um yeah, so we work uh with businesses and individuals um on all aspects of taxation, whether it is tax planning, um, tax uh resolution, tax litigation, audits, uh expert witness work, um yeah, uh everything related to tax.

SPEAKER_00 1:51

Well, I could tell you as a family lawyer, you know, most family lawyers know a little bit about tax law, but they're, you know, I especially am very upfront that, you know, as a family lawyer, I don't provide tax advice. But when there is a tax liability or tax issues rear their head in divorce, it's wonderful to have a cadre of professionals that you can call on. And uh whenever there's a tax issue that comes up, you're at the top of the Rolodex. We've worked on several cases together, some pretty complex cases that I wasn't so sure were going to get resolved. And um, you have provided outstanding advice. So it's why I'm so excited to have you here to talk about some of these issues that I have questions about. I'm sure that viewers will have questions about. Um, but let's dig right in.

Find The Real Tax Liability

SPEAKER_00 2:37

So um, commonly we'll see when we have a uh a party that's getting divorced, they might realize for the first time as part of the divorce, even that they have a tax liability. So let's say you've got a husband, you've got a wife, they owe tax liability. Um, what do people need to know as they begin the divorce process with that liability on the table?

SPEAKER_01 3:01

Yeah, I think the first step, most important step, is to know how much do you actually owe? Have all the returns have have they been filed? Are they filed correctly? And do we would know what the liabilities are? I don't think you can go into a divorce not knowing if you owe taxes or how much do you owe. Because you will not have a proper assessment or understanding of the actual assets and liabilities. You have to know. You have to gather all the documentation, you have to make sure the returns are prepared properly. So I think even before you file, if you have a chance to start gathering those documents, because they may be difficult to obtain uh later on, as I'm sure you you know this better than I do. Um, so it is extremely important that all the documents are gathered. All the documents are researched and all the tax returns are filed, and that they are filed properly.

Filing Separately To Protect Yourself

SPEAKER_00 4:05

So you would say before you get into a force, say you've got a client that has done maybe just 2018, they just stopped doing taxes. And I don't judge, but this is a more common situation than you might think. Um what would your advice be to them?

SPEAKER_01 4:22

Yeah, so I would advise the spouse who is being proactive, maybe being more responsible, to gather the tax documents so they can file separately if necessary. Okay. Because you cannot force the other party to file. You cannot force um anybody to sign a tax return, but you can file separately and ascertain at least your portion of the liability.

SPEAKER_00 4:55

So what what guidance would you give to somebody, say they're a stay-at-home parent and the breadwinner? Um, let's just let's just say it's the husband that's the breadwinner. He has not filed taxes since, say, 2018, there's a stay-at-home parent. They become aware that there haven't been taxes that have been filed, but they haven't really uh produced any income, or maybe it's just marginal. Is there any advice that you would have for them?

SPEAKER_01 5:20

That is so frustrating. And I see this scenario more than I would like. So for the stay-at-home parent uh that has uh the breadwinner who is not cooperating, who it's not producing the documents, who it's not being forthcoming on the income and you cannot ascertain the income, I would advise them to file separately to protect themselves and report whatever income or no income that they had. Later on, you can file jointly if you can convince the other party, if it would be advantageous to them, or if the court forces the other party to file. But in the meantime, I would probably file separately to protect and to start the statute of limitations on assessment against that um that spouse.

SPEAKER_00 6:14

And so as a family lawyer, when we are sitting down at um, you know, the negotiating table, the mediation table, or even at the outset of the case where we're just trying to get the lay of the land about what the assets and liabilities are. Um, it's difficult when you have a situation like that where you don't know what the tax liability is because folks are concerned about it, but I'm not able to tell them what to do about it because we don't even know what the liability is. So is the only way to figure out the tax liability is to actually do the tax returns.

SPEAKER_01 6:47

Absolutely.

SPEAKER_00 6:48

Okay.

SPEAKER_01 6:49

Yes, you you have to, because there's so many nuances and so many things that can change in the process of preparation. Um there could be credits that they're eligible for. Um, there could be exemptions. So all of these things could actually reduce the tax liability, and you won't know until you actually prepare the taxes.

SPEAKER_00 7:11

Okay. And let's say that you do owe a tax liability. What are options for parties as they're embarking on their divorce journey? They owe tax liability, what can they do?

SPEAKER_01 7:23

Yeah, so in the first thing I would look to is the innocent spouse uh process, whether or not my client uh knew of these taxes, benefited from these taxes, uh, whether they filed a joint return, there has to be a joint return. And there has to be an assessment of taxes due to the other spouse not being completely honest. I would look into that and see if my client qualifies. It's usually the wife, um, not to be sexist, but it's usually the wife uh that we ask for the innocent spouse. We haven't done it for our husband as well. Um we look to that option to see whether we can make uh the client uh exempt uh from having to pay the taxes.

SPEAKER_00 8:15

Okay.

SPEAKER_01 8:16

If they do not qualify, then we can look at um installment agreements. Um if they cannot pay, we can look at forgiveness, which is called an offer and compromise. Every situation is different. And there are several options that we can explore. Uh, it's it is hardly ever the case that it is decided that it's final and you have to pay these taxes going forward. So there are abatements, uh installment agreements, there are there are a lot of options.

SPEAKER_00 8:50

And is that a negotiation that you would lead on behalf of the client? And can that happen at the same time as the divorce is playing out?

SPEAKER_01 8:59

Usually not. Um usually that is done, that is after after the divorce, once the liability is set. Okay.

Joint Liability And Wage Garnishment Risk

SPEAKER_01 9:08

During the divorce, I um if if the liability is ascertained, we know how much it is, we know that the parties are responsible. Here in Texas, uh, because it is a community property state, the parties are jointly and severally liable uh for the taxes, uh meaning they are each responsible for 100% of the taxes. And you may say, well, wouldn't that result in them overpaying uh taxes? No, and that means that the IRS, the government, can go after either party for the full amount of the tax liability. They usually go after the low-hanging fruit, meaning um if one party has a job and a paycheck, that's usually to uh levy, that's usually to garnish. Whereas if someone is uh self-employed, uh it's a bit harder to track down debt income. It's a bit more difficult. So the spouse with a paycheck usually gets their wages garnished.

SPEAKER_00 10:18

And we'll get situations where we know that there's a tax liability. Let's just use a round number. Let's say they owe $100,000, which is a pretty large amount. And in the um final decree of divorce, we talked about this as we were preparing for this. It says uh one party is going to pay the $100,000. Does that get the other party off the hook if that is uh sign, seal, and delivered inside of a final decree of divorce?

SPEAKER_01 10:44

Right. Alex, uh that's why it is so, so, so important for um the client to work with a family law attorney who really understands tax law. Um a lot of attorneys don't know this, but the government will not look to your state final order divorce decree uh to determine who pays for the taxes. They uh they apply federal law, which supersedes the state law, and they will go after either party, independent of what it says on the final order. That's why it is so important to work with an attorney who understands this. I see this over and over and over, where it will say um husband will be responsible for the tax liability of $100,000. Well, guess what? The government doesn't care. It's federal law, that it supersedes the state. Uh so what ends up happening is the spouse doesn't pay the liability. The IRS goes after the other spouse. I've seen the other spouse end up paying 100% of the liability, even though it says on the divorce decree that uh the other spouse will be responsible. And now they have to reach out to you to enforce that um decree, that final order, and spend more money and maybe be able to collect if you're lucky.

SPEAKER_00 12:18

And that's especially dangerous because if you say have a hundred thousand dollar tax liability, one of the parties is ordered to pay it, usually there's some sort of offset somewhere in the negotiated settlement where if a party is taking on a big liability like the tax liability, then they're probably getting some other asset to offset it. But if then the party that wasn't ordered to pay the liability is the one paying it, you have a very lopsided settlement. And like you said, that's where you really need an attorney that kind of knows the way all of these pieces fit together and what the federal government is willing to do and is able to do. Right. Um, otherwise it can it can become very unfair.

SPEAKER_01 12:58

Yeah, exactly. So um I advise um the responsible more responsible divorcing spouse to uh take on paying the liability if you know that they're going to do the right thing and pay and then adjust the asset allocation. And if the payment can be done in the process of the divorce, even better. But you have to work with a family law attorney who knows and understands this. Otherwise, it can be a disaster.

SPEAKER_00 13:34

So let's

Installments Offers And Collection Pauses

SPEAKER_00 13:35

go back to some of the options that parties would have to pay a tax liability as part of a divorce. The first option that you mentioned was, I believe, a payment plan. This would just look like negotiating with the IRS and figuring out a way to pay the full tax liability, but over time.

SPEAKER_01 13:54

Not necessarily. It's not necessarily the full tax liability. If the if the the party cannot pay the liability in full, we may be able to negotiate a partial installment agreement. And it works like this. Uh we would uh disclose uh the income and expenses of the of the individual, we disclose that to the IRS. And uh we there's a calculation. Um the government allocates what they think it's a reasonable amount of money that you should spend on food, education, transportation, uh, housing. Um, and we look at the income and then we deduct those uh those allowances, and based on what is left over, um, we come up with a monthly installment payment that may be less than what it would be like paying the actual liability, the entire liability.

SPEAKER_00 14:50

And then the person that owes the liability, the client, they would have the option whether to accept that payment plan or not.

SPEAKER_01 14:56

Absolutely.

SPEAKER_00 14:57

Okay.

SPEAKER_01 14:58

Also, um, the IRS has 10 years to collect, and it's 10 years from the filing, the date of filing, 10 years to collect the taxes. So if the payment plan, even a partial payment plan, crosses over those 10 years, the liability goes away at year 10.

SPEAKER_00 15:18

Oh, okay. Yeah. Interesting. And so then the second option you mentioned was an offer and compromise. Tell us about that.

SPEAKER_01 15:25

Okay, so an offer and compromise, it's really hard to obtain. You very you pretty much have to show the government that there is no way that you can pay this liability within the next 10 years. Usually if you um if you're in a fixed limited income, um, or if you have a disability, uh, health issues. Um, yeah, so but it's the uh the government is very stingy in giving those out, understandably. Um one more option, and that is something called currently not collectible status. That is a one-year reprieve from paying the taxes. Um could be that you are undergoing health treatments or temporary disability, or you're without a job, or you're just recovering from a divorce. Uh, we can explain that to the government, advocate on your behalf, and obtain a temporary reprieve from collection of the taxes. And then a year later, it's usually a year. A year later, we can reassess and see if we can ask for more time, or maybe an installment agreement, or an offering compromise is an option.

SPEAKER_00 16:37

Okay. And then the final option that you mentioned that I want to dig into a little bit because I think it would be of interest to listeners is innocent spouse

Innocent Spouse Relief And Proof

SPEAKER_00 16:46

relief. And this is a situation where I see folks have heard of this, but I don't know that they have all the details on it. And I'm curious to get your take on this. But we will get um clients, they're they're the spouse that is not necessarily the breadwinner, and they weren't the ones that had handled the finances during their divorce. And so they this is usually the way it plays out. You start the divorce process, they're kind of out of touch with the finances. We start doing discovery, we start learning a little bit more, peeling back the layers of the onion, and we discover there is a huge tax liability or there's this a huge problem that's out there. There's a tax time bomb ticking, and they didn't know anything about it. And a lot of times they'll also say, Well, these were joint return, but I never signed anything. So innocent spouse relief is probably going to be of some interest to somebody that really wasn't involved in the finances, but now has discovered that they potentially are on the hook for could be a large sum of money, tax liability. What is innocent spouse relief and how would somebody this like how would you pursue it?

SPEAKER_01 17:58

Yeah. So in lay terms, uh innocent spouse relief is the IRS um making it so you're not jointly and separately liable, so you're not uh responsible for the taxes. There's some uh it's kind of it's a little bit difficult to obtain, but um, if you filed a tax return jointly, you are not aware of the liability, um there is an understatement of the taxes, usually because of uh income that wasn't reported or due to fake uh deductions and credits. Um the IRS may relieve that spouse, the innocent spouse, uh, from having to pay those taxes.

SPEAKER_00 18:47

So what do you have to prove? And do you always have to show that the other spouse was completely in the dark, like they didn't even sign off on it, like it was a fraudulent signature, or are there other ways to prove it?

SPEAKER_01 18:58

Right. You have to show that you have lack of knowledge or reason to know. And there's an exception for domestic abuse. If there is domestic abuse, you do not have to show the lack of knowledge. Um, but to show lack of knowledge, we usually um show that maybe the spouse didn't have any the sophistication. We look to education, the type of work that they do. If they were a stay-at-home spouse who did not have access to the finances, let me give you two examples on um uh uh innocent spouse cases that we worked on. One of them, uh, the the wife was married to an attorney, actually, and he he actually cooperated. But he kept a locked office in the house and uh she had no access, she had no access to the mail. Uh, she did not have any education that would assist her in uh understanding the finances. Another one was actually very sad uh because she did not have access to the mailbox, she did not have access to any mail, any finances, and during our it was heartbreaking actually, during our process of assisting her, she managed to get a uh couple pieces of mail. She hid it in the vent, Alex. She was that scared. Uh, she was that desperate to get a hold of any tax documents that she could. So these spouses obviously had no access to the finances. They had no way of knowing this is probably an abuse case as well.

SPEAKER_00 20:39

Well, if you're hiding things in the vent, it sounds like there's there's something going on.

SPEAKER_01 20:44

Yeah.

SPEAKER_00 20:44

So so if you sign it do do all of these cases involve like a fraudulent signature, or I guess what I'm wondering is if you actually did sign on the dotted line on your tax return, is the IRS going to view that as C? You knew what you were doing.

SPEAKER_01 21:01

No, no.

SPEAKER_00 21:01

Okay.

SPEAKER_01 21:02

No, you do not. Um you you could have signed, but still have no understanding and knowledge of uh of the tax documents. Okay. So it doesn't have to be a fraudulent signature. And um it could be uh that that you signed, but you didn't really understand.

SPEAKER_00 21:19

Because we'll get folks that'll that'll say, yes, I did sign, but I had trusted him or her to do the finances. I was trusted to do this other piece of our marriage. I didn't know that he or she was doing that though. Yeah, yeah. Um so it sounds like there is a solution that if that's the case.

SPEAKER_01 21:38

So even if you signed a tax return, you may still be eligible for for the innocent spouse um process. And we'll analyze it, we'll look, we'll try, we'll try the worst that can happen is for the government to say no.

SPEAKER_00 21:52

Right.

SPEAKER_01 21:53

Yeah.

SPEAKER_00 21:53

So what what is the what kind of evidence do you need in order to prove that there's some sort of domestic abuse or family violence, do you need a conviction?

SPEAKER_01 22:03

No, you do not. You do not. And um in one situation, the the husband actually wrote a letter and said I kept her um uninformed on purpose. He actually had used money from her personal trust, which was that's helpful.

SPEAKER_00 22:18

Probably pretty rare.

SPEAKER_01 22:20

It's it's rare.

SPEAKER_00 22:21

But that would be helpful.

SPEAKER_01 22:22

Trevor Burrus We could use um we could use uh testimony from neighbors, families, friends. Okay. We could use you do not you do not have to have a um a police uh report. Uh you do not have to have a conviction.

SPEAKER_00 22:40

Uh we can use circumstantial evidence or surrounding evidence or testimony uh to support would that just look like getting affidavits from neighbors and we have used affidavits uh successfully in the past and um also the the client's testimony um saying that uh she endured uh physical mental emotional abuse um so yeah it it it is it's it's fairly lenient when it comes to that are there any examples you can think of maybe from your practice or or just you know just for examples for us of people that would not qualify for innocent spouse relief or maybe that you've tried and and it it didn't meet the burdens that the government set up and uh and what the education of the spouse really plays a role.

SPEAKER_01 23:31

Okay because if you should have known if you're a person with a certain sophistication that should have known um also we look to whether you benefited from from from the income. So in circumstances where the uh the spouse actually received cars, vacations, shopping um springs a harder argument to make they did not so one of the elements also would be unfair to hold the other spouse liable so that uh yeah so if you benefited and you had a sophistication or education level that that'd be difficult.

SPEAKER_00 24:15

Okay.

Divorce Settlement Strategies For Tax Debt

SPEAKER_00 24:16

So let's say that you are a divorcing party and you're now sitting down at the mediation table, you're at the negotiating table, you know that there is a tax liability let's say for the purpose of argument you don't qualify for for innocent spouse relief. We've already talked about that. What are what what would your approach be? What would your advice be to folks for their options now to deal with this tax liability?

SPEAKER_01 24:42

Okay. So if we establish that um innocent spouse is not an option I would look and see whether the liability can be satisfied in during the process of the divorce whether there are free assets, cash assets that can be used to pay the liability right then and there.

SPEAKER_00 25:00

Okay.

SPEAKER_01 25:01

Okay.

SPEAKER_00 25:01

That's uh that's one one uh yeah $100,000 tax liability you got $100,000 worth of cash your advice most likely is going to be pay it off yeah wipe it out.

SPEAKER_01 25:12

Yeah because the the the liability is going to keep accruing interest right and we we don't know uh if uh if the parties are going who is responsible enough to pay for it. Okay.

SPEAKER_00 25:25

Okay if that's not an option let's say that there are retirement assets and there's no cash uh then I would look to the most responsible party to take on um payment um maybe um force them to get um into an installment agreement okay with the IRS that could be a um uh part of the agreement um and if uh if that is not an option for whatever reason and there's still liability left over and um that liability is going to be allocated between the spouses spouses can ask for something called mirroring okay and uh that is basically the separation and allocation of the liability so the IRS will split the liability and allocate it to to each party this takes time it cannot be done for the purpose of avoiding taxes and you have to have filed a joint uh tax return and um you're no longer married so that can only happen after the divorce decree is entered yeah and you're literally again our example $100,000 tax liability you're literally asking the government just make me responsible for $50 and then my spouse will be responsible for $50. Is it possible to allocate it other than 50-50? No they'll only split it down the middle. Yeah and and so that would remove the joint and several liability.

SPEAKER_01 26:58

Correct that's exactly that's exactly what it's doing.

unknown 27:00

Yeah.

SPEAKER_00 27:01

And how common is that? Because I could say as a family lawyer we could try to work that into an agreement that the parties will cooperate to try to get the account mirrored but is it common that the government's going to approve that?

SPEAKER_01 27:13

No the IRS doesn't like to do it and it takes time and and and effort on our part. So it has to be worth it um uh the paying an attorney to do it too.

SPEAKER_00 27:23

Aaron Powell What burden do you have in order like what evidence is the government looking for to approve a mirroring agreement? That you're no longer married that you were joint and severally liable that you had uh filed a joint return um that you did not know uh of the liability um it's basically the same process as asking for the innocent spouse except that you did not the IRIs did not grant you're not getting absolved of it it's just okay so option one pay it off option two the more responsible party who whomever the parties determined that might be in the at the negotiating table would be the one to pay it off uh option three which is tough to get mirroring what are the other options the other options are the installment agreements the offer and compromise which is the forgiveness um yeah okay and if somebody is say awarded a debt or maybe they're they're 50-50 and then the government takes you know garnishes the wages of one of the other parties even though the other spurs person was supposed to be responsible for it then you as the tax attorney are going to be looking to the family lawyer to say you've got to do some sort of enforcement in the family court.

SPEAKER_01 29:02

Yeah.

SPEAKER_00 29:02

Um and and I can tell you and I know that you know this it's you can maybe get an enforcement you can get a judgment um but Texas has very strict rules about what can be garnished and what's accessible when you are carrying out a judgment. So you might just get a piece of paper. So frustrating um and then you've got to go and enforce it. Yeah and there is a very high exemption limit in terms of the amount of money that you have you're allowed to have a car and a house and retirement accounts and um if you could figure out a solution before you get to that point. This is as a family lawyer figure out that solution because an enforcement and getting a judgment and then enforcing that judgment is not a reasonable solution to figuring out and it costs money to do it too.

SPEAKER_01 29:53

Yeah so frustrating so yeah yeah if you can make it so it doesn't get to that point um absolutely and that's why hiring and working with the right team really makes a difference pays for itself.

Tax Smart Asset Division And Closing

SPEAKER_00 30:06

What other pitfalls, red flags or just basic guidance do you think people need to know when they have some sort of tax issue and they're getting divorced?

SPEAKER_01 30:19

Here's another instance when it's so important to work with an attorney who has the sophistication understanding of uh finances and taxes not every asset is treated the same in the division of assets during a divorce you could be taking on assets that are going to be taxed potentially taxed at a higher tax rate if uh if you need access to cash right now maybe taking on retirement plans it's it's not ideal. Maybe there are other and I know you and I have worked on puzzles making this work uh maybe there are other sources of cash and liquid assets that can be tapped into that are not taxable or that we can equalize between one spouse and another so that the tax burden doesn't fall on all of just one spouse.

SPEAKER_00 31:18

Yeah no that's a very good point. And a point that I make to clients that have assets and particularly different types of assets is that a dollar in a house is not worth the same as a dollar in a retirement account. And it's not worth the same as a dollar in a savings account. So true. Doing that tax impacting work um is really important to do at the outset and working with um somebody who is attuned to tax knowledge and then also you know we've work with financial planners as well that can help us do that work and they work with our clients during the divorce process and then they also can help them afterwards once they've got everything settled up and create a plan for the future.

SPEAKER_01 32:01

I love that.

SPEAKER_00 32:02

Yeah. So is there anything else that we didn't talk about that you think folks need to know or that you see in your practice and man I really wish that people didn't do this or they did do this.

SPEAKER_01 32:12

Anything we missed I I I think uh preparing for the divorce, gathering all the documents, filing all the tax returns, I really really really wish that uh everybody getting divorced that has a tax problem works with an attorney who understands the taxes because I don't want to see another decree that says um the parties will one party will be responsible for the taxes and then they come to me because they're not paying and your wages are getting garnished.

SPEAKER_00 32:44

It breaks my heart every time I see that um so yeah knowledge is power when it comes to certainly yeah well Lucy Petri incredible Houston tax attorney thanks so much for joining me can you tell folks that are listening or watching where if they've got a tax issue where they can find you. Yeah but before I go I just want to say that I have really enjoyed working with you Alex and what I really appreciate is your um watching your compassion and the treatment of your clients um uh it was really um uh nice to see that you took on some really technical um aspects but you still carried your compassion throughout the process in working uh with our clients so thank you for that I really appreciate that and and there's a reason that we work with you uh and it's you're very good at what you do and you're very good with our clients and take good care of them.

SPEAKER_01 33:43

Okay where to find me uh pet3lawfirm.com okay uh the office number is 713 8598000 we're on all the social media uh pet3law is p-e-t-r-y and uh we're easy to find.

SPEAKER_00 33:59

All right Lucy thanks so much for joining me my name is Alex Hunt uh if you'd like to find Hunt Law Firm you can find us at family lawyerkady.com or you can call us at 832 3155494 we'll see you next time thanks for watching