Sheridan v. Sheridan, 247 N.J. Super. 552 (Ch. Div. 1990) is a New Jersey case that requires trial judges to report evidence of any illegal activity to the proper authorities. In most matrimonial cases, this comes up in the context of dealing with unreported or under reported income. Such cases are known as “Sheridan cases.”
When a couple is arguing over alimony and/or child support, which are mainly calculated based on parties’ earnings; tax returns are often offered as proof of income. However, when those tax returns indicate that the tax filers have taken too many liberties with deductions, credits, or simply have under-reported or failed to report their income, judges may then report them to both the New Jersey and Federal Taxing Authorities, who in turn may then decide to conduct investigation into these tax filings.
If the tax return was filed jointly, both parties may be at risk here, and both may be reported by the judge. It is not family judge’s job to make determination which spouse is guilty and which spouse may be innocent of tax fraud.
The IRS Criminal Investigation Division is a serious matter with grave consequences for those who are found to have “cheated” on their taxes. There are hundreds of convictions of people who attempted to evade paying taxes. As such, anyone who is aware that his or her taxes are questionable, should think twice before offering them into evidence in family court.
Individuals and business owners often have more than one way to complete a taxable transaction. Most try to conduct business and personal transactions in such a way as to reduce or eliminate tax liability. Although they sound similar “tax avoidance” and “tax evasion” are drastically different. Tax avoidance lowers your tax bill by structuring your transactions so that you reap the largest tax benefits. Tax avoidance is legal. Tax evasion, on the other hand, is an attempt to reduce your tax liability by deceit or concealment. Tax evasion is a crime.
But how can you tell when tax planning goes too far and becomes tax evasion? The distinction usually turns upon whether actions were taken with fraudulent intent.
Business owners often find themselves subject to more scrutiny than wage-earners with a similar level of income, because a business owner has more options to avoid tax, both legal and illegal. Here are some of the most common criminal activities in violations of the tax law:
- Deliberately under-reporting or omitting income. Simply put – concealing income is fraudulent. Examples include a business owner’s failure to report a portion of the day’s receipts or a landlord failing to report rent payments.
- Keeping two sets of books and making false entries in books and records. Engaging in accounting irregularities, such as a business’s failure to keep adequate records, or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements, generally demonstrates fraudulent intent.
- Claiming false or overstated deductions on a return. These range from claiming unsubstantiated charitable deductions to overstating travel expenses. It can also include paying your children or spouse for work that they did not perform. The IRS is always vigilant when it comes to inflated deductions from pass-through entities.
- Claiming personal expenses as business expenses. This is an easy trap to fall into because often assets, such as a car or a computer, will have both business and personal use. Proper record-keeping will go a long way in preventing a finding of tax fraud.
- Hiding or transferring assets or income. This type of fraud can take a variety of forms, from simple concealment of funds in a bank account to improper allocations between taxpayers. For example, improperly allocating income to a related taxpayer who is in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder’s children, is likely to be considered tax fraud.
- Engaging in a “sham transaction.” You can’t reduce or avoid income tax liability simply by labeling a transaction as something else. For example, if payments by a corporation to its stockholders are in fact dividends, calling them “interest” or otherwise attempting to disguise the payments as interest will not entitle the corporation to an interest deduction.
New Jersey judges who have found underreported income can and have reported such returns to the authorities for further investigation. That is why litigants who are willing to go to court knowing that they have potential tax issues, do so at their own risk. These individuals should give serious consideration to settling their matter out of court and/or hiring a reputable tax specialist to help them.