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 the net worth analysis.
Both civil and criminal cases often involve an element of proving or disproving income of an individual or business. It is not unusual for a divorce case to include allegations of hidden income or assets. In contract disputes alleging the loss of sales or profits, an accurate determination of income is critical.
In criminal cases, the issues surrounding the income of an individual or business have even higher stakes. These cases are quite often tax-related matters, but cases involving white collar crimes and drug trafficking usually include questions about income too.Continue reading
This article was originally printed in the ABA Section of Family Law eNewsletter, November 2013.
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.Continue reading
This article was originally printed in the ABA Section of Family Law eNewsletter, October 2013.
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.Continue reading
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.
In divorce and child support cases, one party may attempt to hide income and assets to deprive the spouse or children of their rightful support. It can be difficult to prove hidden earnings or assets, particularly if the other party owns a business, owns assets within corporations or partnerships, or has other financial vehicles that could be used to conceal wealth.
However, there are ways to discover the existence of assets or reasonably estimate the person’s level of earnings. One such way is a lifestyle analysis, which calculates the earnings necessary to live the known lifestyle of the target.
This article was originally printed in the ABA Section of Family Law eNewsletter, Feb/March/April 2011.
When a divorce or a child support issue is looming, it’s amazing how a quickly a closely held business starts “losing money.” I use quotes because such a situation is so predictable. One party wants to protect her or his assets, and when there is a business involved, the motivation to hide money can be stronger than usual.
The types of businesses that can be prone to manipulation of the books include restaurants, retail stores, doctor or dentist offices, construction companies, auto dealerships, and law practices. This list isn’t exhaustive by any means, but it provides good examples of businesses at risk of financial maneuvering.Continue reading