Tanya Helfand, a family lawyer in Whippany, answers:
While a divorce case is pending and the parties are still married, if it makes financial sense to file a joint tax return to save money, the parties should do so. The Court has the power to compel parties to file a joint return or issue a credit to the party who lost money because the other party refused to do so. Bursztyn vs. Bursztyn, 379 NJ Super 385.
If, however, one party knows that the other spouse is not being honest regarding income and taxes so that there may be liability to the taxing authority (IRS or State), the honest party should not file jointly with his/her spouse and cannot be compelled to do so. If parties file joint tax returns, there is what is called, joint and several liability in the event of fraud or misrepresentation. The IRS or State can come after either spouse even if one was the earner and the other stayed at home.
If a spouse was not involved with the finances and absolutely did not know about certain unreported income, the spouse can try and limit his/her liability through the “innocent spouse doctrine”. However, if the spouse knew or should have known about the fraud, there cannot be a claim as an innocent spouse.
For example, Case #1, a husband owns a diner (a cash business). The parties’ basic living expenses including mortgage, cars (Hummer & Mercedes), food insurance, etc. is $13,000.00 per month. The wife stays home with the children, but shares a joint checking account with her husband and helps to pay bills. They sign a joint tax return showing personal gross income of $45,000.00 per year because that is how the husband’s W-2 was prepared. The wife, obviously, will be held jointly and severally liable in this case.
Case #2, Husband owns a diner; again the parties’ expenses are $13,000 per month. His W-2 shows approximately $234,000.00 per year justifying the money in the household. Again, the wife is at home with the kids and knows nothing about the husband’s business. The husband takes another $100,000.00 out of the business and makes another investment without any disclosure to his Wife whatsoever, but fails to claim this $100,000 on his taxes with his wife. Wife has a much better case to be freed of liability under the innocent spouse doctrine, but it is always a big fight with the IRS.
In order for a couple to file jointly and save the most money, the parties must still be married on December 31 of the tax year for the filing the following April. Many people wait until after January 1 to get a divorce to take advantage of the financial benefits of filing jointly assuming there is no “funny business”.