Accounting for Hidden Income in Divorce Proceedings

One of the most contentious issues in any divorce proceeding involves calculating the income earned by the primary wage earning spouse when that individual owns or operates his or her own business.  Unfortunately, it is quite common for a business owner to downplay his or her earnings during a divorce proceeding.  Additionally, it is common for many business owners to not accurately report their income on their tax return filings – and accurately accounting for any hidden income in divorce cases is essential.

Using a Forensic Accountant to Find Unreported or Hidden Income in Divorce

Files SearchIn order to determine whether or not there is unreported income, there are a number of steps that can be taken.  It is often recommended that a forensic accountant be retained to assist in evaluating the cash flow of the business, as well as any hidden income issues that may be associated with the business operations.  It is important that the attorney you retain to represent your interests has familiarity with the forensic accountants and how they conduct their valuations.  The accountants will utilize a number of methods in determining whether or not there is unreported income associated with the operation of a business.

One such approach is for the accountant to analyze the company’s gross profit margin and compare that profit margin to the industry standards.  Forensic accountants have access to a number of databases, wherein they can analyze the industry standards and compare them to operations of the business in question and render a determination as to whether or not the gross profit realized from the business varies from the industry norm.  For instance, an individual who owns and operates a pizzeria may claim that his income is well below industry standards.  A good forensic accountant will conduct a due diligence inquiry as to the number of pizza boxes and supplies ordered by the pizzeria owner and an analysis can be undertaken comparing the stated profits versus the amount of product that is purchased by the entity.  Such an analysis can reveal that there is, without question, unreported income.  It may also be recommended that there be some personal observation as to the operation of the business, such as watching how many customers enter the business which could provide a basis for calculating what the level of sales should be.

Lifestyle Analysis

Another effective tool in rendering a decision as to whether or not there is unreported income involves analyzing the lifestyle enjoyed by the parties who are in the process of getting divorced.  For instance, if the lifestyle of the parties is that they are spending $10,000 per month (i.e. $120,000 per year) on expenses and the tax return reflects only $50,000 in income, it would be quite obvious that the stated income is underreporting the actual income that was earned during the course of the marriage.

An effective tool to use in analyzing whether or not there is unreported income is the parties’ case information statement.  The parties’ case information statement outlines with specificity for the court the monthly expenditures on behalf of the family for shelter, transportation and all personal expenses.  The forensic accountant can perform what is called a “lifestyle analysis”, to determine the accuracy of the expenditures made on behalf of the divorcing couple.  On occasion, the forensic accountant will analyze the parties’ personal records, i.e. bank statements, monthly bills, etc. to determine the actual marital lifestyle.

Contact an Experienced NJ Divorce Lawyer Today

In the event you are in the process of getting a divorce and you reside in Ocean County or Monmouth County and your spouse is a business owner, it is extremely important that you make the right decisions as it relates to your contemplated divorce filing.  It is important that you retain a divorce attorney who is experienced in dealing with hidden income issues.  Partner Vincent C. DeLuca, a certified matrimonial attorney, offers a free consultation to all divorce clients and works with financial experts in many divorce proceedings.  If you are interested in scheduling a free consultation with Mr. DeLuca, or any of the experienced matrimonial law attorneys at Villani & DeLuca, please call today at (732) 965-3350.  Villani & DeLuca has three office locations through Monmouth and Ocean Counties in Wall Township, Freehold and Point Pleasant Beach.