This process can be particularly complex when one or both spouses are high earners or business owners. From executives to tech CEOs, to former high-earning spouses who may be choosing not to work, courts examine financial evidence closely.
In this blog, we will explore how the court views income in four unique situations and discuss key issues such as the need for forensic accountants, penalties for poor bookkeeping, and what happens if assets are hidden.
Determining Income for Support
The Executive
When one spouse is an executive, the court considers more than just salary to determine the available income for support. Executives often receive various forms of compensation, such as:
- Base salary – This is the easiest figure to establish, as it’s typically well-documented on tax returns and pay stubs.
- Bonuses and commissions – These can fluctuate, but the court may look at past years to determine an average.
- Stock options and other equity compensation – This can be trickier to assess, especially if the options are not yet vested; courts often resort to expert testimony to value these assets.
- Fringe benefits – These might include company cars, travel perks, or housing allowances.
The Small Business Owner: A Deep Dive into the Books
Small business owners present unique challenges in divorce cases because they have more control over how their income is presented. Courts typically look beyond tax returns and dive into the financial statements of the business to ensure an accurate picture of income. Common tactics courts look out for include:
- Personal expenses paid through the business – Business owners might pay for personal travel, cars, or meals and categorize them as business expenses. If the court determines these expenses are unjustifiable personal perks, they will add them back into the owner’s income.
- Depreciation and amortization – These are legitimate business deductions, but courts often “add back” these non-cash expenses to the owner’s income for support purposes.
In cases where the business’s finances are complex or unclear, a forensic accountant may be needed to provide a more detailed analysis of income and expenses. However, if the business’s finances are straightforward, or if both parties agree on the figures, the additional expense of a forensic accountant may be unnecessary.
Penalties For Irresponsible Bookkeeping: A Business Owner’s Worst Nightmare
For business owners specifically, failing to maintain accurate records or attempting to hide income through creative bookkeeping can have severe consequences in divorce court. Judges have little patience for business owners who take unjustifiable personal perks from their business or mix personal and business expenses. Some of the ways courts penalize poor bookkeeping include:
- Income adjustments – If the court finds that a business owner is writing off personal expenses as business costs, they will adjust the income figure upward to include those amounts in the owner’s available income for support.
- Tax penalties – In extreme cases, the court can refer the matter to the IRS or state tax authorities, leading to audits, penalties, or even criminal charges for tax fraud.
If you are a business owner, it’s critical that you understand that courts can behave like your worst nightmare of an IRS auditor when examining your financial records. They will scrutinize every deduction, perk, and expense to ensure nothing is being hidden or misreported.
The Tech CEO: Income Beyond Salary
Like executives, tech CEOs often receive compensation in forms other than salary. In addition to their paycheck, they may receive:
- Stock options and restricted stock units (RSUs) – Courts must decide whether to include these forms of compensation in the support calculation, and if so, how to value them.
- Deferred compensation – This type of compensation may not be accessible immediately, but it can still count as part of the CEO’s income for support purposes.
- Company profits – If the CEO holds a large equity stake in the company, the court may examine the value of the business itself and any profits it generates.
Tech CEOs might also have fluctuating incomes, depending on the company’s performance. In these cases, courts may take a multi-year average of the CEO’s earnings to determine a fair level of support.
The Previously High-Earning Spouse: Voluntarily Reducing Income
When a spouse who previously earned a high income appears to be choosing not to work or is underemployed, courts may impute income. This means the court will assign an income level based on what they believe the spouse could be earning, considering their education, skills, and work history.
Courts often view a spouse’s decision to stop working or take a lower-paying job with skepticism, especially if it seems like an attempt to avoid paying support. For example, if a spouse with an MBA and 20 years of experience in finance suddenly decides to become a freelance consultant making a fraction of their prior salary, the court may impute income at their previous level, considering them capable of earning more.
The Role Of Forensic Accountants In Determining Income
Forensic accountants can play a critical role in divorce cases where there is a dispute over income or assets. However, they are not always necessary. Here’s when you might need one and when you can go without:
When you likely need a forensic accountant:
If your spouse is a business owner, has complex investments, or you have a reasonable suspicion that they may be hiding assets or income, a forensic accountant can provide both you and the court with a detailed financial analysis. They can trace cash flow, identify hidden assets, and ensure that all income sources are properly accounted for.
When a forensic accountant is likely not needed:
If your spouse is a salaried employee with clear financial records, or if you agree with the valuation of assets and income that has been conducted, the additional expense of a forensic accountant may not be justified. In these cases, a simple review of tax returns, pay stubs, and financial statements is often sufficient.
Consequences For Hiding Money And Other Assets
Some spouses may be tempted to hide assets or underreport income to avoid higher support payments. However, the penalties for this can be severe. If the court discovers that a spouse has hidden money or assets, they can:
- Impose sanctions – This can include fines or even jail time for contempt of court.
- Adjust property division – Courts may award a larger share of the marital estate to the other spouse if they find that one party was hiding assets.
- Revisit support awards – If hidden income or assets are discovered after the divorce is finalized, the court may modify the support order to reflect the true financial situation.
In many cases, the court’s ability to uncover hidden assets is greatly enhanced by the use of a forensic accountant. They can trace financial transactions and reveal any undisclosed assets, providing the court with the evidence needed to impose penalties.
Want To Make Sure You Are Getting A Fair Financial Outcome? Fenchel Family Law PC Is Uniquely Positioned To Guide You Through This Process.
Divorce can be a highly emotional and financially complex process, especially when your spouse – or you and your spouse – have high incomes or own businesses. Our award-winning team of attorneys not only has over 100 years of combined practical experience, but also a background in finance and corporate law, giving us the unique insights needed to handle complex financial portfolios, as well as the inner-workings of the California family courts.
We are driven by our competitive need to win and secure the results you desire as we craft a deal that meets both your immediate cash-flow needs and long-term financial goals. Book your free case evaluation today to learn more about how we can fight for you.
