To read this article directly on Forbes and/or to leave a comment, please click on this link: http://www.forbes.com/sites/jefflanders/2013/01/30/what-a-divorcing-woman-needs-to-know-about-her-husbands-cash-based-business/
If a legal formality marking the end of a marriage was all an estranged couple needed, divorce would be short and . . . well, if not sweet, at least simple.
But, that is never the case. Even if a marriage didn’t outlast the wedding reception, there would still be assets to divide, bills to pay and discussions (contentious or otherwise) to be had about how to do it fairly.
The goal of your divorce process is not only to put a legal end to your marriage so that you can move on with your life. The goal of your divorce process must also include the negotiation a fair settlement agreement, so that when you do move on, you’ll have a financial footing that’s as firm as possible.
In an ideal world, spouses would want only the best for each other even as they part ways. But, in the real world, we all know that kind of “friendly” break-up is rare. Even in relatively amicable splits, each spouse needs to protect his/her interests to be sure the settlement is fair . . . and naturally, this is especially critical for the less-monied, or supported, spouse—who even today, is most often the wife.
Child support is usually determined based on a formula that varies from state to state. Spousal support, on the other hand, is typically dependent on a variety of factors, and the courts have fairly wide discretion on this. The list of factors the Judge may choose to consider includes: the income and property of each spouse, earning capacity of each spouse, impairments in earning capacity, whether there are any children (and who will be raising them), standard of living during the marriage, duration of the marriage and sacrifices or contributions one spouse made to the career and/or education of the other.
Your husband’s income plays an important role in this complex calculation, and that’s precisely why determining how much he earns should be an early and major responsibility of your divorce team. Sometimes, it’s a straightforward task, involving little more than an examination of his pay stubs and tax returns. However, the process can be significantly more complicated when sources like these don’t seem to tell the whole story.
For example, if your husband owns his own business, and especially if a high percentage of the business income is in cash, it can be extremely difficult to determine his true income. Why? Because cash can easily be hidden. (See my earlier blog post to learn 21 signs your husband may be hiding assets.) Cash is often used to buy luxury items that can add significantly to a person’s net worth, without ever having been reported to the IRS as income.
Miles Mason, a Memphis divorce lawyer and CPA of long experience, has written a book about divorce litigation involving complex financial assets. He notes:
Cars, boats, and even second homes can be purchased with income obtained with secreted cash. Restaurant and bar owners, lawn-service companies, and painting and drywall subcontractors are all often paid by customers with cash, which is often not reported on tax returns. (Unfortunately, some lawyers even transact business this way.) Understanding the type of business and how it is transacted is one key to investigating an unexplained increase in net worth. Some spouses of business owners may have a clue about this tax fraud and whether it occurs on a regular basis. During the marriage, there may have been a time when cash was paid for items in the presence of the non-business-owner spouse, and the owner may have even bragged about this particular shortcut “saving” money on taxes.
If this sounds familiar, you should assume your husband will use the same tactic during your divorce. He may try to hide cash in order to appear as though he can’t afford much spousal or child support.
So, what exactly do you need to know about your husband’s cash-based business?
The short answer is “as much as possible.”
If you have a good sense of the business income and expenses, assets and debts and how it is run financially, you will be sharply attuned to whether your husband is underreporting his income in the divorce process. You’ll know where to look for cash flows he might have neglected to mention. The more you know about the business operation, the sooner and more accurately you’ll sense wrongdoing if his income documentation doesn’t say what it should.
And please don’t make the mistake of thinking your husband is not in a profession that affords much opportunity for him to spend or squirrel away undeclared cash.
The opportunity exists in nearly every job, not just the ones that typically see a lot of cash transactions. College professors may take consulting jobs outside the classroom. Doctors’ practices may pay for their cars. Think about whether your husband has had those kinds of side jobs or material benefits over the course of your marriage, and then think about whether they have been reported as income.
Even better, let a carefully-prepared, comprehensive Lifestyle Analysis do the “thinking” for you. A Lifestyle Analysis prepared by Certified Divorce Financial Analyst™ will alert you to the possibility your husband is trying to hide and/or dissipate marital assets. If the Lifestyle Analysis shows that the lifestyle exceeds the reported income, the extra money can only have come from:
- sale of assets,
- gifts or
- unreported income and/or assets.
If the evidence suggests your husband’s records are incomplete, inaccurate or downright fraudulent, your divorce team will have to construct a likely picture of his “true” income. This process is called imputing income and may require the talents of a forensic accountant. These highly specialized accountants like nothing better than to piece together true income and net worth from documentation that deliberately does not show the complete picture.
As I mentioned above, if your husband is in a cash-based business, you need to know as much as you can about the financial aspects of his work. To that end, a Lifestyle Analysis is a good first step, and it can help ensure you will receive the most equitable distribution of assets possible and a reasonable amount of alimony for a reasonable amount of time.