Husband uses company card for himself

I believe my husband does not report all his business income. He charges most of his personal expenses on a charge card that is paid by his business. Because of that, I refused to sign our personal income tax returns.

Does that hurt the value a judge will give to the business? If so, I won’t get a fair division of assets in his divorce case. Is there anything I can do? Internal Revenue Code § 61 requires taxpayers to report all income. And § 446(b) requires taxable income to be based on an accounting method that clearly reflects income.

IRS regulations clarify IRC sections. Regs 1.4461(a) (4) requires all taxpayers to maintain accounting records that ensure the filing of correct tax returns. Regs. Sec. 1.6001-1(a) requires everyone who files a tax return to keep permanent records that prove the true income, deductions, and so on. Last, IRC 162 permits business to deduct reasonable business expenses.

Your husband had to repost all business income and have written receipts to support his business deductions. Business expenses must be reasonable and reasonably necessary. If the IRS learns about unreported income and unsupported business expenses, several bad things could happen.

The IRS would perform an audit to look at all the books and records and match up sales with income. Any income earned, but not reported, will be added to the reported business income. Undocumented claimed expenses — including his personal expenses — will also be added back into income. Then the IRS will recalculate the tax that should have been paid, calculate the interest due and add penalties.

The IRS can ask the U.S. Attorney to file criminal complaints against tax cheats. If convicted, criminal penalties will be assessed and the defendant can be sent to federal prison.

Because you refused to sign the joint income tax returns, you should be declared an “innocent spouse.” That’s good. But you’d be the innocent spouse of a man who has paid lots of money in taxes, interest, penalties and accountants and lawyer fees. So he may have no job and no income, and may be in prison.

To avoid this, your lawyer should suggest to the other lawyer that your case be decided by an arbitrator. The arbitrator’s contract should provide that 1) everything testified to and all documents will be kept secret; 2) the arbitrator’s award shall have only conclusions — with no written findings; and 3) the award will be incorporated into a judgment of divorce.

If your case is tried before a judge, the judge has the discretion to report the dirty facts to the IRS and DOR. If your husband insists on an open trial, the judge may order you have more than half the total. If so, whatever sweet revenge your husband thought he’d get will be sour.