Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Determining income in divorce proceedings

When couples get divorced in Maricopa County Arizona, each spouse is required to submit to the court a document called an Affidavit of Financial Information [“AFI”]. The document, which can be prepared by the parties or their legal representatives, is also known as Form DROSC13f-010119. The AFI is used to assist the court in creating a separation plan regarding assets, spousal maintenance, and child support payments. The AFI requires answers to such questions as the following:

  • General information about the preparer of the AFI
  • Children’s names and dates of birth
  • Other person’s to whom the spouse provides support
  • Employment information, including the name and address of the spouse’s current and previous employers and gross income from the last three years’ tax returns; also, the spouse’s total gross income from January 1 of the current year to the date of the AFI
  • Expenses paid by the spouse’s employer such as for automobile payments, auto expenses, and lodging
  • Commissions and bonuses
  • Monthly expenses paid for children
  • Health insurance payments
  • Dental/vision insurance payments
  • Unreimbursed medical and dental expenses
  • Childcare costs
  • Schedule of all monthly expenses such as for house payments, rent, yard work, utilities, food, clothing, transportation or automobile expenses
  • Outstanding debts and installment payments currently owed

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CPA experts who are retained by one or both of the spouses are often ordered by the court to determine the annual income earned by one or both of the spouses. One of the many tools available to the expert is the AFI.

The expert can back into the annual gross wages that the preparer of the AFI would have to earn in order to pay the cash disbursements recorded on the preparer’s AFI. To do this, the expert will tally up the total monthly expenditures reported and then divide the total by a representative combined federal and state income tax rate typically enjoyed by the AFI preparer. For example, if the total monthly expenditures reported on the preparer’s AFI equal $10,000, and the effective tax rate is, say, 25%, the required gross monthly income to cover the $10,000 in monthly expenditures would be $10,000 divided by 1 minus the tax rate of 25% ($10,000 ÷ [1 – 25%]). In this example that would put the gross monthly income required to pay the expenditures at about $13,333. The expert will then multiply this amount by 12 to get an annual income amount which is then compared to the income reported on tax returns and yearly deposits recorded in bank statements.

The preceding calculation is only a preliminary check on the reasonableness of income reported in the spouse’s tax returns. There are other factors that must be taken into consideration when this type of calculation is used. They include other sources of cash to pay monthly expenditures such as those paid by credit cards or loans from banks or relatives; also, payments out of investment accounts or from other bank accounts.

Using the AFI to determine a spouse’s annual income is only one of several “arrows in the quiver” used by the expert.

 

Donald R. Bays, CPA, ABV, CVA, CFF is a Director in the Litigation+Forensic Services Group of Henry+Horne. He can be reached at donb@hhcpa.com.