Analyzing Historical Earnings for Support Calculations

This article was originally printed in the ABA Section of Family Law eNewsletter, December 2013.

Spousal support and child support are most heavily influenced by the earnings of the parties. Historical earnings will play a big part in these calculations, so it is important to properly analyze them.

Income can easily be determined in cases in which the party or parties only receive traditional wages. The rate of pay is constant, and it is easy to confirm historical earnings. The forensic accountant must be careful to account for things like raises, overtime earnings, or periods during which a party does not work. However, as a general rule, past earnings can be easily analyzed and future earnings are fairly predictable.

It is more difficult to analyze income when historical earnings fluctuate. This might happen because the earnings include things like bonuses, commissions, stock options, other incentive pay, or profit sharing. Remember, too, that earnings can go beyond what is reported on an income tax return. What is shown on an income tax return may not reflect the actual income or cash that is available to the spouse.

For example, commissioned salespeople can see wild fluctuations in their earnings based on changes in the economy, the industry, or the companies in which they work. A landscaping business will likely see income vary substantially throughout the year. Real estate developers may have little income in some years, but substantial income in other years, depending on the progress of projects. Corporate executives can see variations in their income related to bonuses and other incentive pay, which are often tied to the earnings of the companies.

Some of the primary things that may affect the earnings of a traditionally employed individual include:

  • Seasonality
  • Promotions or demotions
  • Other changes in job duties
  • Changes in compensation structure
  • Changes in the employer’s business
  • Changes in the industry
  • Changes in general economic conditions

A self-employed individual can experience changes in income related to:

  • Seasonality
  • Expansion or contraction of the business
  • Changes in the industry
  • Changes in general economic conditions

Historical earnings will be evaluated using primarily income tax returns, wage statements, and paystubs. However, earnings situations that go beyond traditional employment will require the analysis of other documents.

When analyzing historical earnings, the important procedures may include:

  • Evaluating earnings over a period of one to ten years, paying attention to the total earnings and individual categories of earnings
  • Looking for a trend in earnings between years;
  • Determining the reasons for any substantial changes in compensation;
  • Analyzing changes in earnings based on changes in rates of compensation, hours worked, and employers;
  • Evaluating how major changes in jobs and responsibilities have impacted annual earnings; and
  • Comparing income tax returns and other documents to declarations, affidavits, or other representations made in the family law case.

The historical earnings of the spouses will be one component of the financial analysis used to determine income for the purpose of calculating support. Ensuring that the above factors are considered will lead to a more accurate and fair assessment of historical earnings.

Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. She specializes in cases of embezzlement, financial statement fraud, white collar crime, securities fraud, and family law. She can be reached at 312.498.3661 or tracy@sequenceinc.com.

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