Quite frequently I will receive an order from a judge, usually from Maricopa County Arizona Superior Court, naming me to evaluate the amount of income which one of the parties to a divorce has available for spousal maintenance or child support. Although I will normally be the last one from my firm who will eventually testify on the case, I usually will use the assistance of one of my firm’s forensic accountants to do the analysis under my supervision.
Sometimes we are informed by the spouse (e.g., the non-working spouse) for whose benefit our analysis is to be done, that the other spouse (e.g., the spouse who is/was the income producer for the household) is hiding money. There are ways to check for income that is not reported to the court by the working spouse.
Some of the techniques that we use to determine whether the income from the working spouse is being hidden from the Court include the following:
- Comparison of bank deposits of a business owned and operated by the income producing spouse to the amount of revenue reported on the tax return of the business. Deposits significantly higher than the revenues reported on the tax return may be an indicator that money is being hidden by the working spouse. The excess deposits may be legitimate, however. For example, the excess funds may have come from loans to the business by relatives or directly to the working spouse who put the monies into the business;
- Comparison of several years’ profit and loss statements of the business in order to note whether the revenues are showing dramatic decreases or, expenses are showing unusually large increases between years. Huge swings are investigated;
- Determination of whether personal expenses are being run through the expense accounts of the business. For example, are fees for a secretive Caribbean cruise of the working spouse being run through the business;
- Determination of whether there are any expenses in the business which, although legitimate business expenses in the year taken, are non-recurring. An example might be expenses incurred as the result of a fire loss that were un-reimbursed by insurance;
- Analysis of persons or business to whom checks are written out of the business. Are they legitimate? In other words, could the payees be relatives, or related businesses of which the non-working spouse is not aware?
- Checking Internet sites for other businesses in which the working spouse has an ownership interest;
- Calculation of gross income to the working spouse based on the type and amount of monthly expenditures he/she reports on the Statement of Financial Condition given to the Court by the working spouse;
- Review of business credit card statements for non-business expenditures; and,
- Interview of the non-working spouse regarding his/her knowledge of the operations of the business (Writer’s note: I had one instance where the non-working wife knowingly signed a joint income tax return which included phony business taxable income which was considerably lower than what was really earned in the business. She told me about it. And, she told the Court. She was so ticked at her soon to be ex-hubby that she wanted him to go to jail – even if it meant that she might, too.)
These are just some of the procedures we use in looking for unreported income. These same procedures, however, can also support the legitimacy of the working spouse’s sources of income and expenses incurred.
Don Bays, CPA/ABV, CVA