You Have Discovered Your Spouse Has Engaged in Hidden Assets, Tax Fraud or Other Bad Behavior. Now What?

In my last article, I provided some suggestions for determining whether your marital assets have been hidden. One of the reasons people prefer to avoid gaining such knowledge is the next question. Now what do I do?

Hiding assets during a court proceeding, such as a divorce, is considered bad legal behavior. There are other forms of bad behavior. We sometimes see people during divorces who have

  • Failed to file their taxes for many years and have a tax obligation.
  • Failed to report income on their tax returns
  • Over reported their business deductions
  • Created bogus businesses to allow them to claim non-existent deductions
  • Lost large sums gambling, supporting a drug habit or a supporting a mistress or second family

What happens if you report such behavior? In Michigan, what you tell your lawyer or accountant is confidential. They cannot report you to the IRS or other agencies. They can help you find the best way to deal with the presenting problem.
Sometimes the problem directly implicates you and sometimes, it is your spouse's problem but it negatively affects the family. Your attorney and accountant are going to help you deal with the problem in such as way to maximize the protections available to your family and to you.

Let's start with failing to file taxes. If your spouse and you have been withholding taxes, it may just be a matter of having the returns prepared and filed. However, in most cases, the reason for the failure to file is that a tax debt is anticipated, including interest and penalties. The couple may not have a good way to pay the anticipated debt. In Michigan, even if you are a non-wage earning spouse, you derived benefit from the failure to pay taxes. In a divorce case, you will probably be liable for the taxes that are due for which there are no withholdings. In order to determine the size of the marital estate, tax returns need to be prepared and filed so we know the true financial picture. Your professional support team will advise you on how best to deal with the shortfall. This situation doesn't improve over time. Best to deal with it.

Failure to accurately report income or deductions, if done by your spouse, can be your obligation if you filed a joint return. I generally advise my clients to stop filing joint returns with the spouse, unless the spouse agrees to mend his/her ways and the client has real confidence in the integrity of the returns. Then hope that the statute of limitations runs before the IRS or the state treasury notices the past incorrect reporting.

When a spouse has an expensive addiction that is not shared between the spouses, the spouse generally feels that the money that was wasted should be repaid. The courts generally support this position. However, you do need to show that you did not support or engage in the addiction. For example, if you accompanied your spouse to Las Vegas on an annual gambling trip, or you frequented the Michigan casinos and lost money gambling too, then the court is unlikely to want to repay you money that your spouse lost while gambling. Likewise, if you partied with your spouse and used drugs and alcohol too, it's unlikely that this will be seen as just your spouse's addiction. If your spouse kept the losses and the behavior a secret and there is money in your estate to repay the losses, then you are likely to have the money "repaid" into the estate by awarding your spouse what was lost by him or her as though it was an asset assigned to them. You will receive assets of the same or similar value.

The key to dealing with illegal or bad past behavior is determine to cut your losses. Chances are that you have been waiting and hoping for years that your spouse will stop engaging in these behaviors. Or you have been waiting and hoping that there will be enough money to make it right - like that gambler who keeps playing to obtain that large jackpot so he/she can pay off the debts. The chances of this happening are slight to non-existent. Instead, you have probably seen the anxiety increase as the situation becomes worse.

Sometimes the best way out of such a bad situation is correct what you can, i.e. paying taxes, and stop supporting the destructive behaviors. There may not be enough money to compensate you for the losses your family and you have sustained. However, living with an addict or with someone who diverts money away from your family to a lover or a second family is not going to improve your financial position. Sometimes just stopping the drain and taking what you can is the best you can do to preserve what you have left.