If you are getting a divorce and your spouse has a closely held business that receives a significant amount of revenues in cash, you should be concerned about cash taken out of the business that is not reported. What can be done to account for this missing income, especially if your spouse is less than co-operative in revealing this information? Here are some points to think about:
1. Get a business valuation expert who is experienced with these types of cases, doesn’t mind rolling up his/her sleeves, and has experience in forensic accounting. Keep in mind that the cost of this type of assignment is usually much greater than just a straight-forward business valuation. You need to budget for this additional cost, and do a realistic assessment of the cost versus the anticipated benefit. This can sometimes be difficult, as you may not know the extent of the unreported income (if any) until your forensic analysis is well under way. Plan the investigative process in phases so that you, your attorney and the forensic/valuation expert can meet to review the preliminary findings and discuss the direction and extent of future work.
2. Stay involved in your case. This is very important, especially if you are familiar with the business operations and procedures. Even if you are not, it is important for your valuation expert to gain an understanding of how you lived during the marriage, as this information can be used to determine if the reported income is reasonable. For example, if your spouse alleges to have only received $100,000 per year from the business, but your life style requires $350,000 per year to support it, this would raise the possibility of unreported cash income, absent any other sources of funds.
3. Conduct a site visit of the business and management interview. During the site visit, the business appraiser tries to get a feel for the operations, the various internal controls that exist, or don’t exist, and who the key individuals are, setting the stage for one-on-one interviews. Because controlling what is said is important, your spouse’s attorney may take the position that your attorney have to subpoena them for depositions or provide written interrogatories. This approach limits the opportunity for informal conversations that may lead the forensic accountant to discover potential problem areas. The financial expert should attend the deposition to assist your attorney in preparing the right questions to ask and to follow-up the responses with further inquiries.
While determining the true economic income of a cash business may be a tedious and time consuming process, it can be done and should be considered when the benefits are thought to significantly outweigh the costs involved. The only way to make this decision is to review the known facts and have a frank and specific conversation with an experienced financial expert, at an early stage of your divorce.
Bruce L. Richman, CPA/ABV, CVA, CDFA, is a Managing Director at UHY Advisors, Inc. in Chicago Illinois, and the author of the book Guide to Tax and Financial Issues in Divorce. He can be reached at (312) 416-4141 or email@example.com. View his Divorce Magazine profile or his website.