How Lifestyle Analysis Can Reveal Unreported Income

Previously posted January 12, 2021

A divorce is a stressful experience and decision for everyone involved. And often times, the topic of finances adds another layer of tension and difficulty.

What happens when there are suspicions that one party isn’t forthcoming with all of their financial information?

Child and spousal support is typically based on the income of each spouse, as determined in accordance with the Federal Child Support Guidelines. Each spouse, as part of their financial disclosure, provides detailed information about their income. Disclosure may include: personal tax returns, notices of assessments, pay statements, employment insurance statements, and pension income or worker’s compensation statements. Plus, if they own a business, they will need to provide corporate financial statements and tax returns – as a starting point.

When trying to get a sense of the amount of unreported cash earnings, one may perform a Lifestyle Analysis through forensic accounting.

Generally, a Lifestyle Analysis could include:

1. Analysis of personal and business tax returns. Most individuals fear the consequences that may come from tax evasion because it’s illegal. Tax returns should be prepared accurately. If there is a suspicion of fraud, it may be useful to interview the spouse’s accountants, business partners and financial advisors.
2. Bank deposit transaction analysis will work to show if any unreported cash has been deposited. This process involves estimating a spouse’s income by analyzing bank statements and credit card statements, as well as, tracing deposits to their verifiable source(s).
3. The Expense method involves gathering details on annual expenditures such as food, clothing, utilities, etc., and then comparing them to income earned. If the spouse hasn’t incurred debt or inherited gifts, it may indicate that the individuals spending doesn’t match the information they’ve reported on their tax return.
4. Statistical data can assist in verifying unreported cash sales if the reported income is significantly lower than the occupation or industry average. An example of this might involve assessing the gross margin of a business relative to the industry. If the gross margin is unreasonably low compared to industry, it could indicate unreported cash sales or that a further understanding of the business is required.

Every situation will require a different analytical approach and methodology. While every method could be applied, one must consider the cost versus benefit of each approach, as well as, the amount of time required to investigate.

Questions about Lifestyle Analysis or income for support calculations? Give the experts at Davis Martindale a call – we would love to work with you!