Cash Flow Versus Income in Family Law Cases

There are many different definitions of income that can be used in family law cases. Local law will play a big part in defining income, but in more complicated cases, other definitions may come into play. The financial expert can help the attorneys and the court to understand the various types of income and why they should be included or excluded from income calculations in a family law case.

The Internal Revenue Code is often a starting point for defining and quantifying income in family law cases. Experienced family lawyers know this is only the tip of the iceberg and doesn’t cover many of the unusual situations that could arise in cases with complicated financial scenarios.

In simpler cases, wage income and business income will be straightforward and will form the basis for calculating child support and spousal support. Undistributed income from a business venture may be an area of contention, but local laws often provide at least basic guidance on including such income in support calculations.

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CHECKLIST: Gathering Financial Documents for Divorce

divorce financial analysisFinancial documents are at the heart of divorces. Regardless of how contentious or amicable a divorce is, the finances of the spouses will need to be separated, and financial documents are required to make the division. Whether the information sought is current or historical, unaltered documents tell the truth about the money. This truth needs to be examined in every divorce before assets, debts, and income can be divided.

While financial documents can often be easily obtained during divorce proceedings, it is much easier for the spouse with access to the documents to simply copy and/or retain the documents. This reduces the number of discovery requests and subpoenas, and eliminates the time spent waiting to receive documents.

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Divorce Lies: Red Flags of Common Financial Untruths

red-flag-fraudExperienced family lawyers are familiar with the common ways spouses attempt to commit financial fraud in divorce: hiding or undervaluing assets, overstating debts, concealing income, and inflating or fabricating expenses. All of these are done in an attempt to get more than the spouse’s fair share in the property division, and to influence the amount of support that will be paid or received.

Successfully advocating for your client involves more than just knowing that these things occur during the divorce process. You must also be able to identify the red flags that indicate the financial issue(s) must be investigated further. Some are easier to spot than others, but once you have identified two or three red flags, it is time to get a forensic accountant involved. The financial analyst’s experience with fraud and deception will be invaluable in evaluating the red flags and determining if there is something of substance to investigate further.

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Why Retain a Forensic Accountant in Your Divorce Case?

divorce financial analysisOne of the hot new things in the area of divorce, especially for high net worth clients, is using a law firm that has forensic accountants on staff. Sometimes the divorce attorneys themselves have credentials in the area of forensic accounting, such as a CPA license, CFE (Certified Fraud Examiner) credential, or CFF (Certified in Financial Forensics) credential.

These law firms tout a number of advantages of retaining them:

  • Expertise in financial matters, including business valuations, tax law, and forensic accounting
  • Ability to investigate the value of financial assets
  • Skills necessary to perform a lifestyle analysis

While these skills and abilities certainly can’t hurt the divorcing client, using your divorce lawyers to fill your forensic accounting needs also has some big disadvantages. As I discuss in my book Lifestyle Analysis in Divorce Cases: Investigating Spending and Finding Hidden Income and Assets, using an outside forensic accountant is preferable for the following reasons:

  • Experience in financial investigations means the work can be completed quicker and more efficiently. The results are often presented better since experts present their results in court and are used to making things understandable for non-accountants.
  • An outside expert can testify, whereas law firm personnel cannot. Even though the family lawyer might not intend for the case to go to trial, it is always a possibility; therefore, it pays to have a financial professional who could testify if necessary.
  • An outside expert is generally perceived as more objective. Ethical forensic accountants attempt to be independent and objective in their opinions, which bolsters the credibility of the calculations.
  • Forensic accountants have experience finding red flags and issues. Their analysis is often more thorough, and their ability to spot problems is often more developed. This can be invaluable for finding issues that were previously unknown.

If the client uses law firm personnel to fill the forensic accounting role, and later needs an outside expert for the case, he or she ends up paying twice for forensic accounting services. It is often more cost effective and efficient to use an independent forensic accountant from the start.

Analyzing Historical Earnings for Support Calculations

Spousal support and child support are most heavily influenced by the earnings of the parties. Historical earnings will play a big part in these calculations, so it is important to properly analyze them.

Income can easily be determined in cases in which the party or parties only receive traditional wages. The rate of pay is constant, and it is easy to confirm historical earnings. The forensic accountant must be careful to account for things like raises, overtime earnings, or periods during which a party does not work. However, as a general rule, past earnings can be easily analyzed and future earnings are fairly predictable.

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Lifestyle Analysis in Family Law Cases

One of the chief concerns in a divorce or child custody case is identifying the true income of one or both of the parties. It is not unusual for such a case to include allegations of hidden income or assets. It is common for a closely held business to suspiciously encounter declining sales and profits following the filing of a family law case.

In each of these instances, properly determining the income of the party is critical to getting a fair and equitable settlement, maintenance award, or child support award. Until you have the correct numbers, the attorney may find it very difficult to decide what is fair or in the best interest of the client.

How can a spouse or parent with little to no direct access to the other party’s financial records prove that there is undisclosed income? What happens if the financial records obtained during discovery appear woefully incomplete? A forensic accountant is the logical choice to help reconstruct financial records, estimate earnings, and analyze fine details of financial documents to prove or disprove income claims.

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Divorce Lies: Red Flags of Common Financial Untruths

iStock_000014758534XSmallThis article was originally printed in the ABA Section of Family Law eNewsletter, March 2013.

Experienced family lawyers are familiar with the common ways spouses attempt to commit financial fraud in divorce: hiding or undervaluing assets, overstating debts, concealing income, and inflating or fabricating expenses. All of these are done in an attempt to get more than the spouse’s fair share in the property division, and to influence the amount of support that will be paid or received.

Successfully advocating for your client involves more than just knowing that these things occur during the divorce process. You must also be able to identify the red flags that indicate the financial issue(s) must be investigated further. Some are easier to spot than others, but once you have identified two or three red flags, it is time to get a forensic accountant involved. The financial analyst’s experience with fraud and deception will be invaluable in evaluating the red flags and determining if there is something of substance to investigate further.

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Finding Hidden Income in Divorce and Child Support Cases

This article was originally printed in the Family Law Review, a publication of the Family Law Section of the New York State Bar Association, Fall 2012.

Family law cases often focus heavily on financial issues. Whether the parties to a case are of modest means or great wealth, both sides want their own version of what is fair. Unfortunately, this can lead one or both parties to hide income and assets. With the help of a financial expert, counsel can identify income and assets that might otherwise go undiscovered, and hopefully reach an equitable end to a divorce or child support case.

Sources of income and assets owned can be identified with the right documentation. Attorneys need to be familiar with some of the most common financial documents so they know what to request. Attorneys with financial knowledge can also help identify issues that may need further analysis in a family law case.

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