As divorce lawyers in Charleston, SC, we know that the first thing divorcing couples lose is TRUST. Due to wounding feelings and disillusionment over the failed marriage, its only natural that one or more of the parties begins to question everything in the marriage including the parties’ finances. In divorces where the spouses are salaried or earn a wage, calculating income and identifying assets is typically a straightforward process. In those cases, there is usually a decent paper trail of the money coming in and the money flowing out. But when a spouse is self-employed, that’s when a divorce can get very complicated. In those cases, we’ve seen a lot of money thrown at legal fees and forensic accountants to try to uncover whether there is money or assets that have been siphoned away. Sometimes the time and money spent examining the couple’s finances is worth the payoff; sometimes its a “snipe hunt” that is a tremendous waste of the parties’ financial resources.
What can be done to: (a) protect yourself from a spouse who is hiding assets or money or (b) if you are the self-employed spouse, to avoid a costly witch-hunt in family court? Here are some practical tips whether for both spouses:
Protecting Yourself from the Dishonest Spouse
As former President Ronald Reagan used to say, “Trust, but verify.” From the beginning of your marriage, become actively involved in your family’s financial affairs. Know your assets, debts, income, and expenses. Insist that all of your family’s financial documents such as tax returns, bank and credit card statements, retirement income statements, and so on are stored in a location where both spouses have full access. Review your individual tax returns and your spouse’s business returns. If you don’t understand what is declared on these returns, take time to meet with your accountant to have the accountant explain it to you.
If you haven’t kept up with your family’s finances but you are heading toward a divorce, here are some signs to look for if you that may suggest your spouse is hiding income or assets.
- No More Mail. If you notice that the post office is no longer delivering your bank statements, credit card statements, and other financial documents to your home, then the change in delivery might indicate that your spouse is diverting these documents for the purpose of hiding assets and income. Contact your bank, your credit card companies, and so on and to get copies of the statements for your own records and review these documents carefully for any suspicious activities.
- Defensive behavior. Beware of the spouse who suddenly becomes secretive, controlling or defensive about family finances and income. This behavior usually signals that the spouse is hiding something.
- Overpayments. If your spouse overpays the IRS, he or she will get a refund later, and “later” may mean after the divorce is final.
- “Loans” from family members or friends. Your spouse may claim that they “borrowed” money from family or friends. In this situation, your spouse may pay them on these so-called loans knowing that after the divorce, friends and family will return the money.
- Unexplained decrease in income. Any sudden decrease income may indicate that your spouse may be deferring his or her income for future distribution after the divorce is final.
- Bogus Business Expenses. When your spouse is self-employed, they can reduce their “bottom line” by creating/adding bogus business expenses such as paying employees who don’t exist or paying expenses to “vendors” who turn out to be friends and family who return the funds after the divorce is final.
Important Point: Before you sign off on joint tax returns, do your homework to make sure the returns are accurate. If you head into family court claiming your spouse makes more money than they declare or, for example, that they get paid cash “under the table,” you will be hard-pressed to argue against the tax returns that YOU co-signed under penalty of perjury as being accurate.
Protecting Yourself Against a Financial Witch Hunt
- Use “GAP.” If you are the self-employed spouse and you wish to avoid any suspicion that you are hiding income and assets, the best thing you can do is run your business according to general accounting principles (GAP). Don’t commingle business and personal funds. Don’t use business credit cards for personal purchases. Give yourself a pay check and avoid taking “draws” from the business.
- Be Transparent. Give your spouse access to all of your family’s financial records including tax returns, credit card statements, statements from retirement accounts, and so on. If you are concerned that your spouse may remove these records, then make a copy of them for both of you.
- Voluntary Disclosure. If you are going through a divorce, be prepared to turn over all of your business’ books and records in a neat and organized fashion. In fact, don’t wait until your spouse’s lawyer asks for this information; give it to your spouse voluntarily. In the end, your spouse is entitled to see the financial information anyway.
- Anticipate Questions. Don’t be surprised when your spouse, their attorney, or their accounting expert has questions for you about your business’ financial affairs. Try to anticipate what their questions might be such as unusual book-keeping entries you may have made to correct mistakes in accounting.
- Don’t Be Defensive. There is no point in being defensive about disclosing your business income. At the end of the day, your spouse is legally entitled to all of this information in the divorce. When you become defensive, or you lag in responding to requests for information or documents, you give the appearance of being uncooperative. In a divorce lawyer’s mind, uncooperative usually singles that a party has something to hide.