NJ Family Legal Blog : New Jersey Divorce and Family Lawyer & Attorney : Fox Rothschild Law Firm : Alimony, Child Support, Child Custody, Prenuptial Agreements, Essex, Morris, Mercer, Atlantic

As tax season is upon is, the issue of whether to file joint returns is upon us as well.  i previously blogged about the topic of innocent spouse relief and the fact that the innocent spouse form that the IRS has published for those seeking innocent spouse status has many traps for the unwary. 

Today, I read an interesting article by the accounting firm Smolin Lupin "Spouses are Guilty Until Proven Innocent - Tax Liability Shared by Both." 

The article reminds that you are generally liable for paying the tax due, plus interest and any penalties. Moreover, even if the income and/or unreporting is attributable to your spouse, since the filing of a joint return creates joins and several liability, your wages can be seized by the IRS.

The article further reminds that one may qualify for "innocent spouse" relief if that taxpayer can prove:

• There is a substantial understatement of tax attributable to the grossly erroneous items of your spouse or ex-spouse.
• The hidden income belonged to your ex-spouse and you didn't benefit from it.
• You didn't know or have reason to know about the understatement.
• It would be inequitable to hold you liable.

The article closes with the following excellent piece of advice:

Don't count on innocent spouse relief if you know your spouse is cheating. Consider filing separate tax returns -- especially if you're in the process of a divorce. It may save you a bundle in the future.
 

As noted in my prior entry on this topic, since the innocent spouse form has to be signed under penalty of perjury, a wrong answer not only could preclude granting of Innocent Spouse Relief, but also could be used to assert - if not prove - tax fraud given a person's knowledge and involvement when the returns were filed.  As such, the bottom line is that great care should be taken when completing this form. A person seeking to do so should consult with an attorney and tax advisor, in advance, so as to not incriminate themself.

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Litigants who get caught lying about their income in their filed submissions to the Court subject themselves not only to denial of their request for relief from the Family Part Judge but they also open the door for problems with the IRS, the State of New Jersey Division of Taxation, the Prosecutor’s office and the Social Security Administration. 

In the recent unpublished Appellate Division decision of Lucci v. Lucci, Defendant ex-husband filed an application in 2008 to permanently terminate his alimony obligation on the basis that his income significantly decreased. Notably, between the time of the divorce in 2000 and the time of the application, Ex-Husband had been successful in reducing his alimony obligation on two separate occasions. First, by consent in 2004, he was able to reduce alimony from $300 to $150 per week. Then, by consent in 2005, he was able to suspend his alimony because he was “unemployed”.  In 2008, he was seeking to permanently terminate his alimony obligation.

Ex-husband stated in sworn Certifications filed with the Court in the 2005 and the 2008 proceedings that he was laid-off of work, went through periods of unemployment and was finally able to obtain employment with much lower compensation. The Ex-Husband also certified that during his periods of unemployment, he received unemployment benefits. 

In opposition to the application, Ex-Wife presented the Court with a sworn Certification from a Company that was never disclosed by Ex-Husband.  The Company stated that it had employed Ex-Husband including the period during which Ex-Husband received unemployment benefits, that Ex-Husband misrepresented his employment status to the Court, and that he had earned income in an amount comparable to that which he earned when the Order of support subject to the Motion was filed. The Company further advised the Court that Ex-Husband provided two conflicting Social Security numbers to the Company. Finally, the Company advised that the income reported on Ex-Husband’s tax returns did not include his income from the Company.

Ex-Husband’s attorney did not know about Ex-Husband’s employment with the Company.

Not only did the Court deny Ex-Husband’s request to terminate alimony but the Court also wrote a letter to the IRS, State Division of Taxation, the Sussex County Prosecutor and the Social Security Administration.   Moreover, the Court granted Ex-Wife’s request to reinstate alimony at $300 per week effective in 2004 and granted her counsel fees. Despite the fact that Ex-husband was reported to the authorities for what the Court perceived to be intentionally wrongful conduct, the Ex-Husband had the gall to appeal the decision to the Appellate Division.

The Appellate Division affirmed the trial Court’s decision with the exception of the effective date of the reinstatement of alimony. The Appellate Division noted that while it was clear from Ex-Husband’s filed submissions to the Court in 2005 that he had provided misleading information, it was unclear whether he provided misleading information in 2004. If Ex-Husband did not provide misleading information in 2004, the Appellate Division noted that the effective date of the reinstatement should be in 2005 when Ex-Husband was required to pay $150 per week in alimony. The Appellate Division directed the trial court to determine the issue after further Court proceedings.

The moral of the story is if you get caught lying in submissions to the Court for which you certified under oath that your statements were true, be prepared to not only pay the consequences to the other litigant but you may also have to pay a hefty price to authorities. 

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Mark Ashton, a partner in our Exton (Chester County), Pennsylvania office and the editor of our Pennsylvania Family Law Blog, wrote an interesting post entitled "The Owner Know Thy Business" on that blog.

To read the complete post, click here.
 

EDITORS NOTE:  Mark's post leads to a discussion of several interesting issues that are frequently encountered in matrimonial cases.  It is not unusual in cases where one or both parties are self employed that there is either unreported income and/or personal expenses being paid through he business.  In those cases, the tax returns are obviously unreliable for support purposes and you have to get the business books and records, credit card records and other documents to determine the business owner's actual income/cash flow.  I say cash flow because that person is not paying taxes on the expenses being paid through he business and the expenses are not added to that person's income.  In some cases, though there are some personal expenses that are paid through the business, that is neither unusual nor problematic from an income tax perspective.  A perfect example is the deduction of automobile expenses.  While this is acceptable, within limits, per the IRS, those expenses have to be added back to income per the Child Support Guidelines.  In fact, all personal expenses are supposed to be added back.  I have been involved in other cases where the husband was declaring just enough income to pay the mortgage, taxes and utilities on the parties' $2 million dollar house and there was no other declared income apparent to pay their other expenses which amounted to a few hundred thousand per year.  In that case, we had to use a forensic accountant to reconstruct the income through the parties' budget because, there were, surprise, sparse records. 

An interesting question, and unanswered question,  is how these non-taxed expenses should be treated for support purposes.  If some declares $100,000 in taxable income and has another $100,000 in non-taxable perks, what is the income number for support purposes.  $200,000 doesn't seem right because only half is taxed.  A normal, taxpaying citizen may have to earn $240,000 or more to have the same net after tax spending power.

A bigger issue to address which deserves its own separate blog entry is what to do when the case has these issues because of a NJ case called Sheridan v. Sheridan.  The rule as per Sheridan is that when a judge hears evidence of unreported income, they are duty bound to refer the matter to the IRS.  As Mark suggests, filing amended tax returns makes the most sense when confronted with this issue - as long as it doesn't happen too late - as was the case in the example in Mark's post.                        -Eric Solotoff

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The process for seeking Innocent Spouse Relief, a provision for individuals concerned about the accuracy of tax returns filed by their current or former spouses, has become a potential minefield.

In June 2007, the IRS published a revised Form 8857 - Request for Innocent Spouse Relief. Prior to that time, the form was short and simple. This one-page form asked the name and address of each taxpayer, whether the relief seeker had been a victim of domestic abuse and feared that filing a claim would result in retaliation, if the IRS had determined an underpayment of tax, and whether the understatement was due to erroneous entries by the spouse. (see note 1) The new form, however, is four pages long and the questions are far more in-depth. Given the possibility for self-incrimination, the form must now be completed with great care.

Often, when preparing a party's financial statement or budget for a divorce action the conversation turns to tax returns. When the parties involved lack substantial debt - consumer or otherwise - and yet still cannot explain how spending exceeded the level of income and asset draw downs, the accuracy of tax returns is brought into question. Often, and particularly in divorce cases, one spouse was not aware that the tax returns were inaccurate when filed. In such cases, that party may be entitled to Innocent Spouse Relief from the IRS.

So how does it happen? How can a spouse not know that the tax return was inaccurate when it was filed? Didn't the spouse sign the return under penalty of perjury? Some common answers clients may give include: 'It was April 15 (or August 15, October 15 if on extension) and my spouse shoved the tax returns in front of me and told me to sign them because we had to get them in the mail that day,' 'I trusted my spouse that the returns were right and just signed them,' 'My spouse told me they were correct, and I signed them,' 'I have no idea of the finances, my spouse handles everything,' and so on. On occasion, 'My spouse forged my name' also has been used.

During divorce actions, it is not uncommon for parties to still file joint tax returns. Hopefully, this is done after the non- or lesser-earning spouse has had his or her attorney and accountant review the returns. Also, it is common that Indemnification Agreements are signed to protect one spouse from the inaccurate income reporting and/or improper deductions taken by the other spouse. However, the agreements are only binding between the parties, not with the IRS or state taxing authorities.

What should a spouse or former spouse do when the IRS comes calling and he or she really did not know that the tax return was inaccurate? It goes without saying that the individual should immediately contact his or her attorney and tax professional - especially now that the new form asks for more and deeper personal information.

The new form asks for more and deeper information than the original, much of which appears as if it could trigger the trap door precluding Innocent Spouse Relief. Worse yet, the responses to many of the questions could possibly be self-incriminating, which is why representation is essential.

Some of the new questions seek the following information:

-your highest level of education
-whether you were a victim of spousal abuse during the years that you are seeking relief (and further asks for a description and documentation such as police reports, restraining orders, doctor's notes, etc.)
-whether you signed the returns, and if so, whether you were forced to sign under duress, threat of harm, etc., or if your signature was forged
-whether you had mental or physical problems both at the time the returns were signed and at the time you are filing the form (and documentation is requested)
-how involved you were in preparing the returns and whether you reviewed them before they were signed
-whether you were concerned that the returns were incorrect or incomplete when they were signed, and, if so, whether you just said nothing or made inquiry
-what you knew about your spouse's income when the return was signed; and further, if your spouse was self-employed, whether you helped with the books
-when the returns were signed, whether you knew that tax was due, and if so, how you thought the tax was going to be paid
-whether you were having financial problems when the returns were signed
-your involvement in the household finances during the years you seek relief, including whether you had access to information and decision-making power regarding finances
whether your spouse ever transferred any assets to you
-a listing of your monthly income and expenses

Since the form has to be signed under penalty of perjury, a wrong answer not only could preclude granting of Innocent Spouse Relief, but also could be used to assert - if not prove - tax fraud given a person's knowledge and involvement when the returns were filed.

The bottom line is that great care should be taken when completing this form.  A person seeking to do so should consult with an attorney and tax advisor, in advance, so as to not incriminate themself. 

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