When the Sheridan Hits the Fan

           Why do litigation lawyers wake up in the middle of the night? Let’s not exclude mediators and arbitrators perhaps as well. It’s the ghost of Sheridan rapping at their chamber door. And who could get a decent night’s sleep when the parties to the upcoming courtroom battle are waging war over their marital or business issues and making veiled threats about the other’s tax deeds. We all know now that there is a third hostile party in court these days. It’s IRS. The courts and judges know that too. They did not get that seat on the bench being babes in the woods. How does this arise? Easy. One party alleges tax shenanigans: “You think he was cheating on me? Take a look at his tax returns.” The business partner who knows where the bodies are buried: “She’s deducted all her personal expenses through the company” Then to quote that great investigator: “The Game is Afoot”. Judges are required to seek IRS involvement. Now I confess my state court trial experience is limited at best as an expert witness in IRS tax matters. But after consulting with my brethren at the bar I can assure the reader that I know of what I speak. This is a problem. And it gets worst as we lawyers as officers of the court must deal with these issues ethically. Don’t ask, Don’t tell may not be the answer. Charlie Abut in July, 2008 did an article for the New Jersey Law Journal which I recommend as must reading. In essence Charlie agrees that looking the other way is not the answer. There is way too much at stake for all concerned. He suggests consulting the New Jersey rules of professional conduct and considering the risk /reward ratio. For lawyers who practice before the Internal Revenue Service knowledge about a client’s nonfiling or incorrect filing requires some action. Circular 230 is the conduct Bible. It requires that we tell a client of the error and advise them they must correct it. Those conduct rules do not require us to turn the matter over to the Internal Revenue Service. If clients have invested in their tax attorney hopefully they will be willing to take advice. For clients who refuse to take any action the only alternative may be to withdraw from the matter. In marital disputes where joint tax returns have been filed or are intending to be filed resting the client’s future on being able to claim innocent spouse status is shaky at best. Such status is far from automatic and actual knowledge and benefit could make such relief impossible. What then is the best answer in handling a potential Sheridan problem? Where tax problems raise their head a diligent lawyer should confront the issue. The purpose is to both insulate the lawyer from ethical issues and to assist the client to be in a better position as litigation goes forward. In difficult cases resort may be had to the IRS voluntary disclosure policy. Fixing the tax problem could be the most important service the lawyer will render no matter how the litigation turns out. There is certainly no easy solution and each case will stand on its own facts.