It’s not uncommon to find that somebody who is living a $300,000-a-year lifestyle is reporting $40,000 on their income tax returns.
It is a common scenario where one party in a divorce operates their own business in which certain expenses are run through the business, and/or fails to report all income on tax returns. Business owners will sometimes pay things like their car payments and cell phone bills through their business, but some people are even more brazen and charge any number of personal expenses directly through the auspices of the company they own. This can occur in any type of business or even a professional practice.
In businesses where customers or clients commonly pay in cash, such as a contracting or landscaping business, it is not uncommon for the business owner to fail to report all of his or her income on tax returns.
By doing so, the business owner creates a problem in a divorce situation.
The first issue has to do with what the non-monied spouse is supposed to do in the event of a divorce. How does that party prove his or her spouse’s actual income for purposes of gaining the spousal or child support to which he or she is entitled?
That often involves hiring a specialist known as a forensic accountant. A forensic accountant can examine records and see where money has been directed. If the business is a cash-based, a person doing improper things would not generally keep any financial books or records—which makes remedying the situation much more difficult.
In that case, it becomes a matter of assessing how much work the business owner/spouse did, and for which clients.
The other issue that surfaces in such cases is the veracity of the tax returns that the couple has filed jointly. If the non-monied spouse has been signing off for years on joint tax returns, knowing full well that a substantial portion of the income is not being reported, he or she could have issues with the IRS when trying to assert a greater level of income in a divorce action.
Some judges are very disapproving of this and consider it their obligation to report the discrepancy to the IRS. However, there are situations in which the non-monied spouse truly has no knowledge of the other spouse’s financial activities and would be deemed an “innocent spouse” by the IRS. In such situations, the monied spouse who handles the finances may simply thrust the last page of the joint tax return in front of the non-monied spouse and instruct him or her to “just sign here.”
Knowing the judge and how he or she is likely to view such a situation is why a legal team with deep roots in the area is so valuable. While judges have the right to make a report to the IRS, it is not an ethical requirement.
If you have questions about a disparity between your spouse’s reported income and actual lifestyle, the old adage “an ounce of prevention is worth a pound of cure” could not be truer. Attacking the problem head-on with a supportive legal team will save you time and aggravation.
By Debra L. Rubin Esq.