1. Allocating the income while married is mandatory from Jan until date of divorce or legal separation- depending on state law.
2. No, the IRS follows property law, not specific wording of a divorce decree - unless it changes the income from community to separate. The buy-out does not change wages earned earlier in the year that were community income. If the decree is silent on tax allocation, it is default 50/50.
3. The withholding tax follows the income. You must also split the withholding 50/50.
4. The IRS notification:
- Mail a physical letter to the address on your current return. It typically takes 6-18 months but could be longer before the IRS notices the mismatch and sends you a letter.
- The letter will show what the IRS has vs what you reported along with a proposed amount due.
- Mark that you disagree with the proposed changes
- Write a brief, easy to read - 5th grade level, letter explaining the discrepancy was caused by divorce in a community property state
- Include copies of: form 8958, w2
- These can usually be uploaded and always have fax and mail options.
If you and your ex have matching form 8958, the IRS should process without an issue. Best wishes
References:
Tax Tips for Community Property States
Allocating Amounts on Form 8958
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