Misrepresenting financial status during a divorce can be disastrous.
Misrepresenting financial status during a divorce can easily result in delay, be proven to be fraudulent, and cause one spouse’s loss of credibility with the court resulting in a much more lop-sided result in favor of the truth-telling spouse.
Family lawyers and forensic accountants have education, training, and experience finding fraud by comparing financial statements with tax returns and other financial records.
Why do experienced family lawyers anticipate, if not expect, misrepresentation of financial status by a party? Because divorce necessarily untangles the spouses’ marital financial web.
Speaking broadly, it is the nature of marriage to share. Money, property, and resources are mingled. The more years married, the more assets to untangle.
It is also the nature of marriage to provide support. One spouse may provide most of the family’s financial support. There is an expectation of income, lifestyle, and the uninterrupted provision of necessities. Correspondingly, temporary orders for alimony and child support come early in the case. This means a spouse’s plan to misrepresent finances and deceive the court could form months before the divorce is filed.
Fairness in the proceedings requires the full and honest disclosure of financial information. But opportunities for shifty accounting, as well as honest mistakes, could occur at any stage. You must pay attention to details! You must present your financial information correctly. And you must scrutinize your spouse’s presentation of the facts.
With attorneys’ assistance, parties negotiate, mediate, and settle issues. They enter into Marital Dissolution Agreements. Financial deception interferes with this process and increases the likelihood of disputed or unresolved issues being placed on the trial agenda. Evidence of financial status is crucial to the judge’s decision making.
Don’t think financial shenanigans are only the purview of the wealthy. To some spouses, “winning” the divorce means getting everything they want, paying little to nothing, and hurting the other party. Best to abandon that way of thinking now.
Why do some spouses misrepresent their financial status?
Sometimes it’s purely about winning. A spouse may understate income, minimize assets (hide assets) and overstate expenses and debts. Other times, and perhaps more often than not, it’s about being caught-up in the emotional upheaval of divorce. You may not feel up to the challenge of crunching numbers and creating financial reports. Yet, you must.
Inattentiveness is a major mistake often made by many people who are struggling emotionally. This is good reason to get into counseling or therapy early. Your ability to make clear-headed, informed decisions can make or break the results of your divorce. You must get your head in the game! As much as it may hurt, you must pay attention to the details. To quote Miyamoto Musashi, “It may seem difficult at first, but all things are difficult at first.”
How does financial misrepresentation affect the outcome of divorce?
Misrepresenting one’s financial status can drag the divorce out, increase the cost of proceedings, and impact the outcome. Here are a few examples:
Alimony: A Spouse conceals her true earning capacity to show a need for increased alimony.
Property Division: The spouse who stays in the marital home undervalues the property. Why? To reduce equity and, consequently, the amount of lump sum alimony paid to the other spouse.
Child Support: A spouse keeps cash sales hidden in order to reduce gross income for the dual purpose of paying less child support and income taxes. Or under-reports profits from his professional practice by paying the commercial rent a full year in advance.
What is financial misconduct in divorce?
What is financial misconduct in divorce?
Experienced family lawyers are always looking for clues to hidden assets, financial maneuvering, and patterns of deceit. Vigilance pays off. Be on the lookout, too. And keep your attorney informed if you suspect your spouse of hiding something.
Do you lack knowledge of the family finances because your spouse “took care of all that?” Tell your attorney if your spouse did the family bookkeeping and prepared your income taxes.
Did your spouse spring the divorce on you? How much time has your spouse had to hide assets, manipulate financial reports, move cash, or transfer property? You must keep your head in the game.
Here are a few tips to help you stay on track.
Don’t Do These 10 Things During Your Divorce:
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Don’t lie about your financial portfolio.
Don’t misrepresent your asset portfolio by hiding valuable tangible property with a cooperating relative, friend, or coworker.
Stashing the family jewels at your best friend’s house may be tempting, but it’s a poor legal strategy. The same goes for hiding antiques at a coworker’s office. Or concealing the Monet painting behind the book case at your boyfriend’s apartment.
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Don’t assume the judge will allow financial misrepresentation or error to pass without consequences.
Are you thinking, “How bad could it be? If I get caught, I’ll just say I made a mistake and that’ll be the end of it,” wink wink.
WRONG! In divorce law, a mandatory injunction enjoins both spouses from doing certain things.
Is lying about finances grounds for divorce?
Is lying about finances grounds for divorce?
It could be. Supporting spouses could be so secretive about divorce, it could be considered financial abuse – not allowing access to marital funds, creating an emotional feeling of isolation and impotence. Financial abuse can certainly be considered inappropriate marital conduct. For more information, view Financial Abuse, Narcissists & Money: A Divorce Lawyer’s Perspective.
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Don’t violate the mandatory injunction.
Are you planning to sneak back into the marital home to remove valuables and conceal them elsewhere? Doing so will garner negative attention from the judge and could result in sanctions. Expect to be held accountable. Furthermore, court-ordered property division could go against you for violating the mandatory injunction.
Don’t transfer real estate, vehicles, or leases to a friend, family member, business associate, or insider in order to move assets out of your name.
FOR EXAMPLE: In wife’s affidavit, she listed the value of her car at $15,000. At trial, she testified, “I sold the car for $15,000 to pay my legal fees.” The husband proved the car’s value was $55,000 and the wife’s friend paid $35,000 cash for it. The wife misrepresented the car’s value and then concealed $20,000 cash from the court.
Similarly, don’t transfer property to a friend or family member with the understanding that he or she will sign it back over to you after the divorce. For more information, read about the TN Mandatory Injunction Law, Cash Flow and Concealed Assets.
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Don’t devalue your property.
If you don’t know the value of something, then obtain a professional appraisal, because “I say so” may not be accepted as a proper valuation for certain classes of assets. Don’t guess. Don’t paint an overly rosy picture. Don’t declare it worthless to anyone but you.
Don’t undervalue a professional practice or ownership interest in the family business to decrease the worth of the marital estate. Or to reduce your income for child support calculations. Or to minimize your ability to pay alimony. When brought to the judge’s attention – and it will be – this attempt to deceive the court will not go well for you.
Falsely inflating what you owe will not fly either. Don’t characterize debts as greater and more burdensome to pay than they actually are.
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Don’t make cash withdrawals from your bank account to secrete the money in a safe deposit box undisclosed to the court.
While we’re at it, don’t withdraw large sums of money to purchase high-ticket items. Don’t add to your Pop Art collection, acquire a yacht, or buy a racehorse. Unless the purchase is in the ordinary course of business, expect the judge to rule it a violation of the mandatory injunction. Divorce is not an opportunity to cash in!
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Don’t become a persistent cash-back credit card or debit card user.
Using the credit card to get cash back? Making frequent cash withdrawals with your debit card? There is a tipping point at which this becomes dissipation of marital assets. Dissipation includes extraordinary withdrawals or excessive spending. To disprove dissipation, you must keep records of every transaction. Describe the date, amount, merchant, and purpose.
Here’s what doesn’t add up:
When? First Saturday in May.
How much? $2,000.
Where? Churchill Downs, Louisville.
What for? Bet on a Derby horse.
Unless you own a contender in the race, gambling with marital money can be determined to be dissipation. You will be held accountable.
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Don’t keep multiple sets of books for the business.
Business valuation experts apply accepted valuation methods which unveil subtle, common errors and patterns of deceit.
In divorce, don’t offer unsubstantiated financial records into evidence with your financial documents. Don’t falsify business reports to make a professional practice appear less profitable or more profitable than it actually is.
On party motion or sua sponte, the judge may order a business valuation by an independent expert witness. Business valuation experts apply accepted valuation methods which unveil subtle, common errors and patterns of deceit.
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Don’t overpay tax obligations to collect a refund after the divorce.
Are you self-employed or an independent contractor? When estimating taxes, do not deliberately overpay the IRS or state taxing authority so you can collect the refund after your divorce.
Did you revise your W-4 to increase employee withholdings? Talk to an experienced divorce attorney.
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Don’t conceal your earnings or employee benefits, particularly deferred compensation.
Deferred compensation includes stock options, IRAs, pensions, 401(k) plans, and other employment-earned benefits, or “perks.” Deferred compensation benefits get paid or taxed as income at a future time. If marital property, then allocation of the value of those benefits must be included in the divorce.
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Don’t ignore your experienced divorce attorney’s legal advice.
An experienced attorney will advise the client against taking action that violates the mandatory injunction. Such as selling an asset without court permission or transferring a title without your spouse’s consent and signature. Listen to your attorney.
Don’t think you can fool the court, the attorneys, or your spouse with a bait and switch either. A Porsche is not a Kia. A diamond is not a zircon. A sailboat is not a dinghy.
What if a financial misrepresentation was an honest mistake?
Was it intentional misrepresentation or financial mistake? Honest mistakes will not always be tolerated or overlooked. With financial matters you must pay attention to the details. Even if you made an honest mistake, you will likely still be accused of misrepresenting the truth. In other words, of lying.
If caught once in a falsehood, then maybe the judge will allow it to pass as innocent error. At least give you the benefit of the doubt. If caught twice, then you may have destroyed your reputation for truthfulness with the court.
You’ll be in a tough spot if your spouse’s testimony is credible on every issue, but yours is not. Once you lose credibility with your judge, it is near impossible to recover. In addition, the judge has options to award additional attorney’s fees for the divorce or as a discovery sanction. Take your pick. For many divorcing spouses, this additional cost has been significant!
What should you do if your disclosures were correct when filed, but something has changed since then?
Financial disclosures are not a one-time thing. Discovery is an ongoing process. Answers to interrogatories should be amended whenever the affiant knows or learns the previous responses are no longer true. Even if those initial disclosures were absolutely accurate when made.
What happens if you hide money during a divorce?
When a spouse’s deception is established, the divorce judge has discretion to impose severe financial sanctions. In addition to a complete loss of credibility, the judge may order a financial penalty paid to the other spouse, hold the misleading party in contempt of court, or a combination thereof.
FOR EXAMPLE: The spouse had a duty to update his income information upon receiving a lump sum pension payment – a marital asset. But he kept the payment a secret. The intentional or willful failure to reveal the pension payment was an abuse of discovery. It was wrongful concealment. The failure to amend his original answers to disclose the payment resulted in sanctions for misrepresentation and other misconduct. Consequently, the other spouse was awarded half the pension payment, plus attorneys’ fees, court costs, and interest.
Always account for any funds taken from a marital asset. Concealment may not be forgiven because you needed money to cover living expenses. And don’t lose credibility with the judge by being careless with your numbers or forgetful with your disclosures.
The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, Second Edition
Miles Mason, Sr. JD, CPA is the author of The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, Second Edition, published by the ABA Family Law Section. “One the ABA’s most popular resources.”
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