Tracy Coenen discusses the early stages of a financial investigation related to a divorce. When evaluating the finances of a business, Tracy explains what to look at first and how those items are analyzed.
How can income be calculated in a divorce case when a spouse refuses to produce documentation or is suspected of concealing sources of income? One way is through the Net Worth Method of Proof, which is used to analyze income and assets when detailed documentation is not available, either because the opposing spouse is obstructing efforts to get data and documents, or because data and documents are legitimately not available.
This method of determining income is used by the federal government in criminal income tax cases. Because it is accepted in federal criminal cases, family courts often will accept this as a reliable method for calculating income.
A detailed analysis of expenditures is performed using any documentation available. Each expenditure for the period under review is captured from bank, brokerage, and credit card statements, and each item is categorized so that totals can be accumulated for the period under analysis.
There are four widely recognized methods of calculating income in family law cases. These four methods have been developed for use by the Internal Revenue Service in calculating unreported income in tax cases, and are the primary ways a lifestyle analysis can be completed.
Specific Items Method
One of the most straightforward ways to complete a lifestyle analysis is through an analysis of specific items of income. This method is possible when there are substantial documents detailing cash inflows, and is considered a “direct method” of verifying income.
Income-related information is gathered from bank and brokerage statements, tax-related documents, and business records. Inflows are identified and summed, theoretically verifying the income disclosed in the family law case. This method is easy to understand and present, which makes it an attractive option for evaluating claimed income. The court will easily be able to understand how income was calculated.
Tracy Coenen talks about what it is like to testify at trial as an expert witness.
Spousal support and child support can be calculated using a number of different factors. The relative importance of the factors may be laid out in local rules, but often the factors are simply listed and defined with little other guidance. Considerations may include:
- The actual earnings of each person, including wages, investment income, and other sources of income
- The earning capacities of each party, both independently and relatively
- Future earning capacities of the parties
- The value of the assets divided, and the ability of those assets to produce income
- The cash flow of each party
Family Lawyer Magazine
2013 Print Edition
A thorough lifestyle analysis can help discover undisclosed income and assets.
In an ordinary lifestyle analysis, the divorce financial analyst extracts all of the transactions from bank, brokerage and credit card statements, categorizes them and calculates totals for each category for the period under analysis. This is an important exercise to assess what the parties to a divorce have historically spent and determining an appropriate level of support. It can also be used to determine whether a spouse was wasting or dissipating marital assets.
More importantly, the lifestyle analysis can also be used to uncover hidden income and assets, or help prove that one spouse is living a lifestyle that exceeds the reported sources of income. The typical lifestyle analysis may only scratch the surface of the financial facts of the case, leaving behind important clues about the finances of the parties. Diving deeper can uncover hidden finances that may have otherwise been overlooked.
Bank statements can be incredibly useful when searching for hidden income during a divorce financial analysis. Both deposits and expenditures should be evaluated, and the process in explained in this video.
In divorce cases, forensic accountants can use the “net worth method of proof” to calculate income. This is used to search for hidden or unreported income. Rather than simply taking a spouse’s word for it that his or her income is X, we can do an analysis like this to try to verify the claimed income. This method of proof is one part of a lifestyle analysis, in which we are analyzing the party’s lifestyle and determining if that lifestyle matches the income that is being reported. This video explains the process of completing a net worth analysis.
When a divorce involves a business, we often ask for a copy of the general ledger. This includes the detailed accounting records for a specified period of time. What can we find in the general ledger? Watch the video to find out!
How does a forensic accountant use bank statements in a divorce or family law case? Tracy Coenen explains why bank statements and credit card statements are requested in these cases.