Calculating Income in Divorce Cases

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There are four widely recognized methods of calculating income in divorce 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. Continue reading

Calculating Lost Profits in Litigation

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In the below video, Tracy Coenen talks about three common methods that are used to calculate lost profits in commercial litigation: the before and after approach, the yardstick approach, and hypothetical profits. In general, these methods are aimed at determining the profits a company would have realized if the incident giving rise to the litigation had not occurred.

Calculating Support in Family Law Cases

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divorce financial analysisSpousal support (alimony) 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 Continue reading

Divorce Issues: Evaluating Income of Cash Businesses

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When a closely-held business is part of a divorce, the income of the business must be examined. It is not unusual for a business like this to suddenly see a decline in revenue, and increase in expenses, or both shortly after divorce is filed. It is often not a coincidence that the financial health of the business appears to suffer when a divorce is pending.

It is particularly difficult to examine the income of a business that transacts with its customers primarily in cash. However, there are ways to verify whether the income being reported is reasonable. Some of the techniques to examine and verify the income of cash businesses include: Continue reading

Are Your Employees Committing Fraud?

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Fraud is big business. Companies are most at risk of fraud from their employees, since they have access to information and assets. On average, companies lose 5% to 6% of their revenues to internal fraud. This means that a company with sales of $50 million is likely losing $2.5 million to $3 million each year to employees with sticky fingers. In this age of amazing shrinking profit margins, 5% or 6% could mean the difference between being in the red or in the black.

You might be thinking that your company has never had that much stolen in one year. Correction: You don’t know if you’ve had that much stolen by employees. Companies can’t quantify exactly how much has been stolen from them, because they simply are not aware of all the frauds committed.

The average is 6 percent, and it’s based upon a consideration of the known and unknown frauds in companies. Don’t get caught in the trap of thinking that your company is much better than average. As managers of companies, you may like to believe that you’re doing better. But some companies are doing better, and some are doing worse. Assume that your company is losing 6 percent, and try to improve on that.

The Schemes
Fraud committed by employees comes in all shapes and sizes, but generally falls into three categories. Asset misappropriations are the ones we hear about most often. These include theft of inventory, theft of money and theft of anything employees can get their hands on. Continue reading

Reasons to Not Use Expert Witness Referral Services

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There are a number of expert witness referral services out there, several of them with high profiles and long lists of available experts. It seems like a good value proposition: An attorney needs an expert in a particular specialty, and the expert witness service does the legwork to find qualified candidates.

However, having worked as a forensic accountant and an expert witness for twenty years, I will tell you that attorneys should NOT use these services. There are a few simple reasons why:

You can find your own expert: In the “old days,” it was a great idea to turn to expert witness referral services, who kept lists of available experts. There were not a lot of expert witness directories, and there wasn’t an internet you could consult. But today it is easy to find very qualified experts with the help of the internet. An attorney can have a paralegal or associate start the search process to find potential candidates, and then the attorney in charge of the case can interview experts and make a selection.

The expert witness referral service does not add value: What value does the expert witness referral service provide other than essentially keeping a list? Sure, they make some phone calls and send some emails to find out who is qualified and interested, but that service is of limited value. While expert witness referral services claim to vet the professionals they present to the attorneys, they often do little more than collect CVs and conduct brief phone interviews. This is not worth the money the services will charge if you hire one of their experts. Continue reading

You Suspect Your Spouse is Hiding Income or Assets

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If you think your spouse may be attempting to hide income or assets during your divorce proceeding, your first step should be to tell your divorce attorney. Your attorney should know how to handle situations such as this, and the sooner he or she can act, the more likely you are to see results.

You should also quickly gather and secure any documentation that might prove your allegations. Financial documents that you can legally access should be copied and turned over to your attorney. This might include tax returns, pay stubs, credit card statements, bank statements, brokerage statements, contracts, or any other documents which might prove the existence of assets or streams of income.

A financial expert with experience in the divorce arena can be invaluable in searching for hidden income and assets. The expert can help you identify the financial documents that will be needed for analysis, and can assist your attorney in determining which documents to subpoena. Continue reading

Evaluating Business Tax Returns in Divorce Cases

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Tax returns can be one of the most important pieces of information a forensic accountant evaluates in a divorce case. Of course, there are other very important financial documents, but income tax returns provide summary information about of lot of financial issues, including income, expenses, and assets. I typically recommend reviewing three to five years of tax returns, but the further you can go back, the better the picture you will get of the personal or business finances.

If a party claims that personal or business tax returns are unavailable for any reason, consider requesting the records directly from the Internal Revenue Service. This requires the consent of an individual or business owner, and can be done with Form 4506, Request for Copy of Tax Return.

On the business side, it will be important to compare the financial statements with the income tax returns. Because of differences in accounting rules and the tax law, numbers for the same period may differ between the financial statements and tax returns. Depreciation is one example of a line item that typically differs between the financial statements and income tax returns. The expert should investigate any differences between the financial statements and tax returns, and refer to the tax laws to confirm whether such a difference is legitimate.

Some of the key information that may be found in the income tax returns includes: Continue reading

Divorce Financials: Finding Hidden Income

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divorceIt is not unusual for the “out” spouse (the one who is not the major breadwinner in the family and who does not have control over the family’s finances) to suspect that income and assets are being hidden during a divorce.  When one party is accused of hiding income, how can a forensic accountant find it?

Below are a few techniques that I may use to uncover hidden income. A more in-depth discussion of this topic appears in Chapter 9 of my book, Lifestyle Analysis in Divorce, published by the American Bar Association. Continue reading