Big Divorce Mistake #2: Not Analyzing Claimed vs. Documented Income

Often, spouses must declare, or claim, what they earn. Very often, they earn significantly more according to their own tax returns, W-2s, 10-99s, and current pay stubs. There are even more documents available from which to compare claimed vs. documented income.

The Forensic Accounting Deskbook by Miles Mason, Sr. JD, CPA, published by the ABA Family Law Section

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.  This updated edition of one the ABA’s most popular resources explains the practice of forensic accounting and business valuation and how to apply it in family law cases. It provides a practice-focused introduction to the core financial concepts in divorce, such as asset identification, classification, and valuation, income determination, expenses, and more.

See Mason’s complete list of the 10 Big Divorce Financial Mistakes.

VIDEO TRANSCRIPT:

Tracy Coenen:             Miles, you know a lot about the difference between claimed income and documented income. Can you talk a little bit about the difference between the two?

Miles Mason:              I think that’s more of a just general discussion term. Documented income is very simple. What you were talking about earlier, W-2 taxable income, financial statements shared with lending institutions. Whereas claimed income is what are you saying that your income is during the divorce. And I love it when one of the spouses has a big difference between claimed income and documented income, because it gives me a lot to talk about. It gives me a lot to cross examine on. It gives me a lot of opportunity to work with my forensic accountant, and that’s the best way I can show somebody’s lying, is the difference between documented and claimed income.

Tracy Coenen:             So, what are some of the documents that you might look at to determine that the spouse is lying about this claimed income?

Miles Mason:              Oh sure. I mean, it could be as simple as a W-2, or it might be as simple as a case where let’s say a spouse earns $300,000 in year X, and they’re only making $250,000 a year, it pays through June 30th of the next year. Well, the net difference in that income is something we’ve got to look at, and if it turns out that the person is working less or doing something to manipulate that income, I can then ask the court to consider, and the court will go ahead and use the higher documented income than the lower claimed income, even if it’s documented in the same document, because of the earnings potential, that it’s so obvious that this person has lowered their income just for divorce purposes.

Thank you to Tracy Coenen, CPA, CFF for inviting me to join her in this video series. Tracy is a nationally recognized forensic accountant practicing in Milwaukee and Chicago.