The most common type of income concealment is when a spouse owns his or her own business. It is a virtually universal complaint that a spouse who runs a business does not report all of the business income. The purpose for non-reporting is to minimize tax liability, and if divorce litigants’ testimony is accurate, it is a rare business person who reports all of his or her business income to the IRS.
If you believe there is hidden income, there are several ways to determine actual income.
- First, if possible, before you separate and litigation begins, make copies of all relevant financial documents you can obtain in your home, or if you have legal right to access them, in your spouse’s place of business. These include financial statements from banks, credit unions, investment firms, or other financial institutions. You should also copy credit card statements, insurance policies, deeds and wills and trusts. The documents should be copied and returned to their original place. In this way, you will have sufficient account information to obtain further records, as well as any information about purchases and any estate planning that your spouse has engaged in. In addition, internal financial information such as ledgers, profit and loss statements, and income statements either in hard copy or on file on the computer should also be copied or downloaded for future reference–again, if you have legal right to access those records.
- Gather evidence of your standard of living during the marriage by cataloguing expensive purchases and vacations. Take pictures of expensive items purchased during the marriage, and make copies of any appraisals or invoices showing the value of any personal property purchased.
- If you are leaving the marital home and your spouse is going to retain possession, take pictures of every room in the house to show the assets that are located there. This also helps when you are trying to negotiate for a division of the personal property.
- Obtain historic bank statements and bank loan files from any joint account. If you have a joint account with your spouse, the bank will provide you with back statements and cancelled checks and deposit slips. You may also be an officer in your spouse’s business, and thus be able to request account information regarding your spouse’s business. (You may be able to obtain information about your status in your spouse’s business by going to the Secretary of State’s website.)
- Check with your accountant or bookkeeper to see if he or she will provide you with financial documents. If the accountant worked for both you and your spouse, the accountant should provide you with any information concerning joint financial transactions–of, if you are an officer in your spouse’s business, obtain financial information about the business.
- Check and print all relevant information on social networking sites such as Facebook or Linkedin, which may show lifestyle information, asset purchases, or other financial information that your spouse may brag about. Be sure to do this as early as possible, before your spouse blocks the sites.
Once you obtain all the financial documents you can on your own, and litigation has started, your attorney should take the following steps:
- Review your spouse’s financial affidavits that are required to be filed with the court. These often reveal more than they intend to, including account information, household expenses, as well as lists and values of assets which may indicate higher income than your spouse has reported.
- File discovery requests asking for financial information that you were not able to obtain prior to litigation, such as names of financial institutions where your spouse has accounts. The opposing party is required to respond, and you will be surprised how much information you can glean from the responses even if your spouse is hiding income.
- If bank accounts are in your spouse’s name alone, or he or she has separate business bank accounts, your attorney can subpoena bank records. The law requires that a bank must notify the account holder of the subpoena, and if the account holder objects, you will be required to go to court to obtain an order for production. However, the information is relevant in a divorce case, and the court in most cases will order the bank comply with your request. You will have to pay the cost of production, but the cost has come down substantially because of the new technologies the banks now use to store information. You should ask the bank for statements, check images, deposit slips and deposited items. If your spouse has only one account, then it is easy to determine how much income your spouse is actually collecting if he or she is depositing income into bank accounts. Determining actual income is more difficult when there is more than one account, and funds are transferred between accounts. You will have to try to follow the funds through each of the accounts, and you may need a forensic accountant or other financial expert to sift through the accounts. If there are multiple accounts, cancelled checks and deposited items can help follow the money trail.
- Subpoena your spouse’s bank loan files. They are revealing, because when people want a bank loan, they want to demonstrate that they have the means to repay, so their financial statements filed with the bank often look entirely different than the income tax return filed with the IRS. The bank loan files also should include the bank’s analysis of the application and other financial information and notes. Therefore, when you subpoena the bank loan files, you should ask for the entire file.
- Subpoena your spouse’s bookkeeper or accountant to a deposition, and request that person to bring your spouse’s files. You can also require your spouse to testify under oath at a deposition. At a deposition, it is sometimes easier to force a deponent to provide information about financial accounts and records than requesting that information through written interrogatories and requests to produce.
- Have a forensic accountant or your attorney’s financial consultant review financial records of your spouse’s business to determine whether the expenses of the business include any personal expenses. If they do, those personal expenses will be considered by the court to be personal income.
- Other sources showing life style or income are UCC filings, obtainable online, which will reveal personal property purchases that your spouse took out a loan on; Dun and Bradstreet reports, and department of motor vehicle records.