Painting a Picture of the Parties' True Income in Divorce
By Charles E. Strickland, III, ASA, CFE, Director, Valuation and Litigation Support Services
Determining the assets and earnings in a divorce engagement is often a complex task. While the divorcing parties may begin the process working toward the best interests of both sides, divorces commonly do not end amicably. A spouse may try to hide or divert assets and earnings from the other spouse in an effort to decrease the marital assets to be divided, or attempt to minimize his or her earnings in an effort to reduce the amount of alimony that may have to be paid.
Spouses may try to achieve the “better deal” by:
- Understating, undervaluing, or hiding certain assets;
- Overstating debts;
- Decreasing actual revenue or income; and/or
- Increasing actual expenses.
To help determine the true earnings of a spouse and whether any assets have been hidden from the marital pot, a forensic accountant is often engaged by one or both parties to the divorce. A forensic accountant should be consulted when a divorce engagement involves any the following scenarios.
The Spouse is the Owner of a Business
Earnings for a business owner may not be readily apparent and may be received in many forms, including wages or salary, business income distributions, and/or payment of personal expenses. In addition, personal expenses may be treated as business expenses in an effort to disguise the earnings used in determining alimony.
During the period of divorce, a previously profitable business may seem to inexplicably take a turn for the worse. This affliction is often referred to as Rapidly Acquired Income Deficiency Syndrome (RAIDS) or Sudden Income Deficiency Syndrome (SIDS). The spouse may begin to complain that business is slow in an effort to reduce the value of the business and earnings.
This is especially common when the business is a restaurant or bar, lawn service company, general contracting company or other trade profession that typically receive cash payments instead of checks or credit cards. Owners of these businesses may not record all of the cash received in an effort to reduce their income tax payments. This, in turn, may reduce the value of the business and/or the amount of earnings the owner reports at the time of the divorce.
The Spouse Owns Rental Property
Many property owners receive their rental income in cash. In addition, tenants who perform repairs on the rental property may be allowed to offset these repairs with reduced rental payments. In such instances, a spouse might record both the reduced rent and the expense of the repairs, thereby disguising the spouse’s true rental income. The leases and rent rolls of a rental property should be reviewed to determine that the monthly rental payments and security deposits have been properly recorded.
Cash is a Way of Life
People who receive unreported cash will often try to unload it by paying for most items in cash instead of using checks or credit cards. One question we often ask a spouse: how do you pay for restaurants, vacations, and entertainment? If a spouse carries large amounts of cash but does not often withdraw money from a bank, it may indicate that he or she is receiving cash from the business or from another source.
A Decrease in the Marital Bank Account Balances or Investment Accounts
An analysis of the bank account balances over time may reveal a depletion of marital funds. A spouse may have transferred money to a new bank account or to friends and/or relatives, or increased personal spending in an effort to reduce the funds to be divided. Bank account statements should be carefully reviewed for unusual outgoing transfers and to ensure that all of the spouse’s paychecks have been properly deposited.
The Spouse Receives Large or Multiple Expense Reimbursement Checks
Spouses who often submit large or frequent expense reports may try to conceal the reimbursements they receive from their employer. A spouse may begin to deposit expense reimbursement checks into a new, undisclosed bank account or into another person’s bank account. The spouse might also attempt to delay the submission of any expense reimbursement reports until after a divorce is finalized.
Other warning signs that your divorce engagement may warrant the hiring of a forensic expert:
- One spouse maintains complete control of the financial records, including access to bank statements and online passwords.
- A spouse has bank account statements mailed to his or her place of employment or a P.O. box instead of the marital residence.
- A spouse claims that his or her income has decreased, but has made no effort to reduce expenses.
Conclusion
A forensic accountant should be consulted in a divorce engagement as early as possible. The divorce team will need to learn as much as possible about the spouses’ finances and/or businesses in order to successfully conclude the divorce agreement. By consulting with an expert in the early stages, the forensic accountant can assist in the discovery process and request any additional documents necessary to perform a thorough analysis of the spouses’ financial records.
The use of a forensic accountant is often essential in constructing a likely picture of the parties’ true income. The discovery of all marital assets and earnings is vital to the process. By determining the parties’ true income and assets, a careful forensic analysis can result in a more equitable distribution of marital assets in a divorce.
