The innocent-spouse rule has come into play numerous times during my career as a divorce lawyer here in the state of New Jersey. This issue typically arises when there is a significant amount of tax debt at the time of the filing for the Complaint of Divorce. The attorneys at my boutique divorce and family law firm deal frequently with this highly fact-sensitive area of the law. Let’s take a closer look.
First, I shall discuss my legal interpretation of the law. Then, I shall share of my all-time “war stories” in which both my, the other attorney and a family judge of the Superior Court of New Jersey all grappled with this convoluted issue.
The innocent-spouse rule allows an individual to seek relief from the Internal Revenue Service (IRS) to elude being responsible for what would be an otherwise a joint tax debt. In order to be successful with such a claim, an individual must meet certain criteria, which we shall discuss below.
In sum, the innocent-spouse rule pertains to situations in which either the husband or wife successfully proves that they did not acquire the tax debt (and, in turn, the liability should only belong to the other spouse). In addition, the individual must be able to prove that they did not gain an advantage or financially benefit due to the lack of payment of the now outstanding tax debt. Typically, this is challenge for any attorney to prove, especially in the context of a divorce.
The purpose of the innocent-spouse rule to shield folks from being responsible for paying taxes that were generated due to fraudulent actions on the part of their spouse during the marriage. For our purposes, the rule is relevant insofar as it applies to a New Jersey divorce action in which one spouse is delinquent in their tax payments and then attempts to stick the other spouse with the fraudulent tax debt that they have accumulated.
Particular conditions must be met in order for the rule to be applicable in a divorce action. To wit, a successful claim involves credible evidence that one spouse committed the alleged fraud without knowledge by the other. In other words, the spouse making the claim of innocence must prove that they had no idea that their spouse was being “funny with their money.
A two-year statute of limitation, so to speak, applies before the IRS will initiate the process of obtaining payment of the tax liability.
Now, a number of years ago I represented a fellow who owned a gentlemen’s club in Union County, New Jersey. Obviously, this was primarily a cash business (I know I sound sarcastic here … perhaps because I am). In any event, this resulted in an extremely high-conflict divorce that raged on for over two years (unusual for Middlesex County, New Jersey, a county that is known for “moving” their case load).
Although the business was a huge success, the folks managed to spend well beyond their means. This included a 1.4 million dollar home in Monroe, New Jersey and living the lifestyle of a “rock star.” However, the “joint” tax debt to the IRS alone was approximately $500,000. The wife in the case claimed innocent spouse relief, claiming that she was merely a homemaker who had no knowledge of the unreported cash as well as the enormous tax debt.
I successfully defended my client in this divorce case and the wife was ultimately found to be 50% responsible for the outstanding taxes. First, I immediately held a meeting with my client after the attorney for the wife made the claim for protection under this tax rule. Here I learned that the wife, throughout most of the marriage, worked at least two nights per week at the Gentlemen’s club as a manager. We then had a number of employees (i.e., dancers) sign certifications that they witnessed the wife counting cash right there at the bar, and then placing it into a large suitcase. Secondly, the wife had a earned a law degree at University of Oxford’s School of Law. Although the wife did not practice law after this couple moved to the United States, she was clearly an intelligent, highly educated woman. A far cry from the, “babe in the woods” routine she was trying to portray. Finally, as she paid all of the household bills and signed both joint federal and state tax returns, extensions and payments plans, I was successful in arguing that it is not credible to believe that she did not understand the dire financial situation. In other words, she understood the deal from day one and reaped the benefits of unreported cash. These benefits included, but were not limited to, extravagant vacations, limousines and weekly spa treatments (for both).
The foregoing demonstrates why, in my legal opinion and vast experience in handling New Jersey divorce matters. In that case, it was clear that the wife knew that she was reaping the benefits from the monies that should have been paid to the IRS. Of course, having individuals willing to testify that the wife was peeling off wads of cash made my case a virtual slam-dunk.
Nevertheless, it is far and few between that a spouse is able to meet all of the criteria to successfully make a claim under the innocent-spouse rule. Simply put, while I have had many cases wherein one spouse was “in the dark” as to the finances of the marriage, it is a tough row to hoe to convince a New Jersey Family Court that one spouse was totally clueless about where the money came from to support themselves and their families.
The complexities of the innocent-spouse rule in the context of a divorce here in New Jersey is yet another reason that a person whose marriage is “end stage” should consult with a law firm that only handles family law related cases. To that end, I invite all inquires to my office. Thank you.