There is a case called Sheridan, that requires judges to report the failure to report income to the proper authorities. Like Big Foot and the Lochness Monster, many people have heard of a Sheridan, but few have actually seen it in the wild. Now, most judges believe that the duty to report is after a trial where there is testimony and evidence, and not during the pre-trial/motion stage. I’m not sure that Sheridan actually says that, but that is the most common interpretation I have heard of.

With so few cases actually being tried, that is possibly the reason why so few people have actually seen a referral to the IRS. I have had judges tell me that they have made referrals and others who have said that nothing ever came of the referral that they made.

On April 3, 2024, in the case of Li v. Liu, an unreported (non-precedential) Appellate Division decision, there was a Sheridan citing.

In that case, the wife filed multiple Case Information Statements, none of which disclosed any earned or business income. At trial, it came out that she owned several massage parlors for which she testified she did not file state or federal taxes for the businesses, pay wages, pay employment taxes, maintain workers’ compensation insurance, or provide employees with 1099 forms. Her rationale was that they didn’t make any money even though she was paying more than $40,000 per year in rent. The trial judge found that she was evasive in her testimony and was not forthcoming regarding her alleged ownership interests in several massage parlors and any related income.

During the trial, the judge said:

“[i]f I find out that there is illegal activity going on, whether that be [an] illegal massage parlor or tax non[-]reporting, not paying employment taxes . . . I have to report that.

The judge knew that there was illegal activity because there was discussion of a news article from 2017 in the record which stated that an individual was arrested at the massage parlor and charged with promoting prostitution. Notwithstanding the admissions regarding the non filing of taxes, etc. and the prostitution arrest, no Sheridan referral was made.

That was one of the many issues that husband appealed, most of them unsuccessfully. That said, the Appellate Division remanded the matter to the trial judge “to clarify if plaintiff’s failure to report her income triggered his obligation under Sheridan v. Sheridan, 247 N.J. Super. 552 (Ch. Div. 1990).” In so holding, the Appellate Division stated:

“Finally, with respect to the judge’s Sheridan obligation, we note in her testimony, plaintiff admitted she earned income which she failed to report to any state or federal taxing authority. If the judge has not already done so, he should consider whether he is obligated to inform the appropriate taxing authorities of plaintiff’s apparent failure to comply with her obligation to file timely taxes on any earned income.

Given the findings noted above, it is hard to imagine that with this gentle nudge, the trial judge won’t no make the referral. Notwithstanding, this is a reminder that Sheridan is more than just folk lore and that parties with Sheridan issues should settle or arbitrate their cases.

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