Almost everyone has heard horror stories about divorce.
Almost everyone has heard horror stories about divorce. For example, during the divorce process, the parties exchange financial information in what should be a transparent process with full disclosure. Based on this disclosure of assets and debts, the parties either reach a settlement or head to trial for the assets and debts to be divided by the court. A year later, they learn that their spouse had a pension plan they did not know existed. Or, perhaps there was a secret bank account as well as other assets accumulated during the marriage that were not disclosed. Another area of concern is when parties submit what is called a financial information affidavit to the court and the reported numbers are not accurate. Child and spousal support claims are often based on what is stated on this form. Underreporting of income can therefore be detrimental to the dollar amount given to a spouse in need.
So what are the tricks of the trade? During the divorce process, it is common for the parties to provide copies of bank and investment account statements, pension plan statements, personal and business income tax returns, credit card statements, any loan application (including personal financial statements) and an assortment of other documents. (such as motor vehicle and real estate titles). Whether the parties have a lawyer or not, it is wise to exercise due diligence when compiling the list of assets and debts. For example, in a simple scenario where both employees are employed with no additional income from a business or rental property, one could verify that the paychecks were deposited into a disclosed account. If the employee is paid twice a month and only one check is deposited, this should be noted, as there is a possibility that the other spouse will cash the check or deposit it in another undisclosed account. Obviously, sometimes the amount deposited may be less if the spouse gets cash back in the bank.
A review of pay stubs is also helpful, as most pay stubs show whether funds are split between two bank accounts (like savings and checks), or whether there are funds going into a 401 (k). (k), a health savings account or other plan that would be considered an asset during divorce. Other deductions on a pay stub should be considered for life insurance policies that may have cash value. Finally, (and some people do, unfortunately), a spouse may over-withhold their federal and state taxes in order to receive large refunds after divorce and keep those funds for themselves.
Another tip for finding undisclosed bank accounts is to look at credit card statements. Monthly statements will show the date and amount of a payment. These payments should be reflected on a bank statement that has been disclosed. If there are any payments that cannot be traced to a known bank account, then this is also an area for further research.
When the parties own a business, the financial analysis becomes a bit more complicated. Often times, the business pays for various expenses that are for the benefit of the owner. Examples include cell phones and monthly cell phone bills, auto payments, auto and fuel insurance, travel and meals, clothing, retirement benefits, and health and life insurance. While the owner / employee may receive a W-2 (depending on the entity structure), their actual income is often much higher. Often times, when filling out the financial information affidavit, the owner / spouse reports the expenses listed above but fails to note that they are not personally paying the expenses. If the business is created as a sole proprietor and the spouse provides net income according to the tax return as personal income on the affidavit without properly disclosing the expenses paid by the business, that too is misleading. Of course, I’ve also seen expenses incurred in a business that shouldn’t have been for tax purposes. It is therefore wise to carefully consider any income statement as well as the supporting documents if these figures will be used on a financial information affidavit. This includes a review of the company’s bank and credit card statements as well as a detailed general ledger. In some cases, a review of the actual receipt justifying the disbursement is required.
In conclusion, the above tips are a starting point for performing due diligence in divorce proceedings. Stay tuned for part two! NBF
By Jenny Staskey
Jenny Staskey, CPA, CFE, CDFA is employed by Aspey, Watkins & Diesel, PLLC as forensic accountant in support of legal services. She can be reached at [email protected].
