11 Mar 2012

How to Prove a Spouse is Hiding Income | Tennessee Divorce and Support

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How to Prove a Spouse is Hiding Income in Tennessee Divorce, Alimony, and Child Support Cases.  Is your spouse hiding income?  In Tennessee divorce cases, how much does your spouse earn?  One of the first and most important steps can be using a forensic accountant to compare claimed income and documented income in Tennessee family law for divorces, alimony, and child support cases.

Finding documented income is important. There are several sources for finding this income. Think of the following as pieces of a larger puzzle:

1. tax returns, W-2s, and current pay stubs;

2. declarations of income in discovery, such as interrogatory responses and produced documents;

3. declarations of income on Statements of Income and Expenses submitted during the divorce process;

4. declarations made as part of loan applications;

5. financial statements submitted as part of loan applications;

6. financial statements generated as part of financial planning and budgeting found on home computer programs, such as Quicken and QuickBooks;

7. imputed income methods discussed below, including adding up deposits on bank statements;

8. bankruptcy filings; and

9. past salaries listed on job applications.

Claimed income on discovery responses and on Statements of Income and Expenses is always an admission. Claimed income will usually be the starting point for challenging the credibility of the declaring spouse. If a spouse lies, or seriously understates income, some triers of fact will absolutely cream the spouse by discounting whatever else that spouse says during the case. Most believe that, if a spouse will lie about something as basic as income, the spouse will lie about anything and everything. Reported income refers to statements declared on external documents completed by borrowers and taxpayers. Comparing and contrasting claimed and reported income usually involves the technique of ICE (comparing internal, control, and external documents). Once you find conflicting statements of income, you must take advantage of that. Often, the testimony of the forensic accountant is the best way to do so.

Most of the time, reported income is factual and straightforward. Other than tax returns, income is usually declared as a part of loan applications. Financial statements and tax returns are provided as supporting documentation as well. Fortunately, borrowers normally list all income, not just taxed income. Understanding what documents lenders require is very helpful.

Loans are usually earmarked as business or personal, even though most small business loans are personally guaranteed by the owners of the business. Also, loans are often securitized by one or more assets. Almost all securitized loans will result in certain documents being publicly recorded. For example, loans securitized by real estate include documents such as mortgages and trust deeds. Regardless of how the law of your particular state describes such instruments, all loan transactions securitized by real estate should be recorded with the county register of deeds or its equivalent. If a financial institution can secure a sizable loan with real estate, it will most likely require that that be done.

There’s no requirement that loan applications themselves be recorded, but you should always try to learn who made the loan, when, and for how much. For example, some spouses who borrow fail to produce the loan application in discovery. That loan application may include financial statements. If it does and you can acquire it, you can then use the information to issue a subpoena to the financial institution, thereby obtaining the loan application package and any supporting financial statements submitted to the lender. Then compare the reported income to the spouse’s claimed income. If there is a material difference, the spouse may have lied regarding his claimed income. That lie may be a crime in his state.

You may often use many of these same steps for business loans securitized by assets other than real estate. If inventory or other business assets are used as security, there may be a publicly fi led UCC-1 or financing statement listing the securitized collateral. When fi led, this legal document gives formal notice to the world that the lender has a superior right to the asset. Securing loans against other assets may be less formal or complicated. For example, a car loan will be documented by the lender’s lien appearing on the face of a car’s certificate of title. The loan may have been obtained by completion of an application at the car dealership. A car loan application is often comprised of a simple declaration of the borrower’s income and a credit report review. Copies of car loan applications, though, may not be maintained by the borrower or the lender. Once the loan is made, the car is the security. When all payments are made, the state reissues the title with the lien removed. If payments aren’t made, there can be repossession. The larger the financial institution making the loan, the more likely it has retained the application.

For most small business loans and lines of credit, all of the business’s assets are usually pledged, and all of the owners/borrowers are usually individually and personally liable for the debt of the business. When a business takes out a loan, it is for a specific amount of money. For a line of credit, the loaned amount can fluctuate up to a preapproved limit. The higher the limit, the higher the annual fee the business is charged. For example, with lawyers, accounts receivable may be the largest asset on the books and may be the asset primarily securitized for a business loan. Note that accounts receivable are not reported on cash-basis taxpayers’ tax returns. This may mean that the list of accounts receivable must be reported separately to the lender. Financial institutions usually have strict and formal procedures and documentation requirements for making loans, which will be adhered to unless the borrower has a long-term relationship with the lender. Having borrowed and paid back large sums of money over periods of years usually means the borrower has such a relationship. Nevertheless, business borrowers are almost always required to update financial disclosures annually. For small businesses, the annual update will usually involve production of at least the following:

1. business financial statements (income statements and balance sheets);

2. business and personal tax returns;

3. personal financial statements signed by the borrowers/owners; and/or

4. formal loan application forms listing income and net worth.

The greater the amount of the business loan, the more documentation will be required for review. The personal financial statement may or may not list income. Claimed income, in some cases, may be supported only by tax returns. But for the forensic accountant, there are two unique aspects to business loan applications that the personal loan application will not have:

1. Business financial statements are often prepared by a CPA.

2. Business and personal tax returns can be compared to financial statements.

When financial statements are issued by the business’s CPA, it means that the CPA firm probably has even more in its files for the client’s forensic accountant to dig through.

 

This blog post is an excerpt from The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers.  Reprinted by permission.  Copyright © 2011 American Bar Association.  All rights reserved.  No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher.  Footnotes may be omitted from the original text.

Miles Mason, Sr., JD, CPA practices family law exclusively and is founder of the Miles Mason Family Law Group, PLC, in Memphis, Tennessee.  Miles is the author of The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association.

The Forensic Accounting Deskbook teaches lawyers, forensic accountants, and divorcing spouses how to look for hidden income and hidden assets in complex divorces involving business owners and highly compensated corporate executives.  Miles has presented numerous seminar presentations on topics including and related to uncovering hidden income and hidden assets at national and regional conferences for judges, lawyers, and forensic accountants.  For a complete listing of speaking presentations, publications, and more of his professional biography, see Miles Mason, Sr.’s professional biography.

Miles Mason

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Memphis divorce and family lawyer, Miles Mason, Sr. is the founder of Miles Mason Family Law Group, PLC. For more information about our professional staff, see our Meet the Team page.

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