As New Jersey divorce lawyers, we routinely encounter people who tell us that either they or their spouse has a business, receives cash income, or earns money that isn't fully reported on their tax returns.
That can create a serious problem in a divorce.
People are required to pay taxes on their income. And when allegations of unreported income become part of a New Jersey divorce case, there can be consequences that extend well beyond how much alimony or child support somebody should pay.
What Is a Sheridan Problem in a NJ Divorce?
When this issue comes up, I often tell clients about a New Jersey divorce case called Sheridan v. Sheridan.
The case was decided in 1990, but divorce lawyers in New Jersey still refer to the problem it illustrates today.
Mr. and Mrs. Sheridan were among the relatively small percentage of divorcing couples who couldn't settle their case and ultimately went to trial.
During the trial, evidence emerged that the couple had acquired assets using money that had not been properly reported for tax purposes.
That created a problem considerably larger than their divorce.
What Happens When Unreported Income Is Disclosed in Court?
In Sheridan, the Court addressed what a Family Court judge should do when credible evidence of potential tax violations or other illegal conduct is revealed during divorce proceedings.
The lesson for divorcing spouses is important: you should not assume that information disclosed in Family Court necessarily stays confined to your divorce case.
If evidence of potentially illegal financial activity becomes part of the court proceedings, it can create consequences outside the divorce itself.
That's why New Jersey divorce lawyers sometimes refer to cases involving significant unreported income as having a "Sheridan problem."
Unreported Income Can Affect the Divorce Itself
There is another problem.
If someone's tax return says that he earns $75,000 per year, but the evidence shows that he actually has access to considerably more income, what number should the Court use when determining alimony or child support?
Tax returns are important financial documents in a divorce, but they don't necessarily tell the entire story.
A New Jersey Family Court may consider other evidence when determining a spouse's actual income and financial circumstances. Depending upon the case, that might include bank records, business records, spending patterns, deposits, lifestyle evidence, credit card statements, or other financial information.
This can become particularly important when one spouse owns a business or is paid substantially in cash.
Don't Ignore a Tax Problem
If you know that you or your spouse has unreported income, don't wait until you're sitting in a courtroom to tell your divorce lawyer.
Your attorney needs to know about the issue early.
There may be tax consequences, credibility issues, support implications, and other legal concerns that need to be evaluated before decisions are made about how your divorce should proceed.
And if the unreported income is yours, hiding it from your own attorney isn't going to make the problem disappear.
Financial Honesty Matters in a NJ Divorce
The moral of Sheridan is fairly simple:
People should pay their taxes.
But there's another lesson for anyone going through a divorce. Financial issues that may have been ignored during the marriage can become very difficult to ignore once lawyers, accountants, financial experts, and potentially a judge begin examining the family's finances.
If you know there's a problem, tell your lawyer about it and get appropriate advice before it becomes a bigger one.
If you're considering divorce and want to better understand the financial issues that may come up during the process, my free Divorce Smarter Course explains important things you should know before and during a New Jersey divorce.
Until next time,
Steve