Financial transparency is essential in a divorce. Without a complete accounting of all of the parties’ debts and assets, a court cannot properly divide the marital estate. You can’t split what you don’t know exists. The same logic applies to hidden income. It becomes much harder to calculate an appropriate amount of child support or spousal support without knowing what both parties actually earn.
Unfortunately, concerns about finances permeate the area of domestic relations. It’s very common for me to hear a client say “I think my husband is hiding money” or “my wife won’t share her account statements with me and I don’t know what she’s hiding.” It’s a scary prospect to head towards divorce with only a fraction of the needed information.
There are workarounds, but for the purpose of this post I won’t get into them. It is possible to argue the existence of an asset or income, even without solid proof. Forensic accountants and lifestyle experts may also play a valuable role. There are many reasons why someone may want proof of hidden income or assets and not want to spend the money on an expert. Accordingly, it’s important for individuals, whether in the divorce process or contemplating, to know what to look for.
When I have a party who is hiding money in a divorce, I use a few tools to figure out what is going on. A very brief explanation of some of the more obvious helpful ones are below.
Start At The Source Of The Income To Find Hidden Accounts
Pay stubs, W-2s, 1099s, K-1s, and complete tax returns (meaning all schedules) are incredibly valuable. If you have proof of compensation, you can easily prove income. Further, it’s likely that direct deposit information will appear on the pay stub. That means if Spouse A is routing a small amount of each pay check into a separate account, that information should appear on the pay stub. There will also be a direct deposit form held by Spouse A’s HR department which will detail what money is being sent where. Spouse B can obtain this information via the discovery process in a divorce. If he or she has access to it independently, it would be worth a review.
If there is a record of compensation, and no corresponding deposit, there is hidden money. In my opinion, you’re more likely to see missing deposits with 1099 employees who may receive manual checks for intermittent work. However, it’s not uncommon for my office to address missing corporate credit card reimbursement payments or deposits from sources other than the employer (dividend payments, insurance reimbursements, etc.).
What we’re looking for is a loose thread. The missed payment may be the only deposit in the secret account or it may be a small fraction of the account’s total balance.
Have Complete Records For All Sending And Receiving Accounts
Let’s say Spouse A and Spouse B maintain separate bank accounts and have one joint account for their shared expenses. Spouse A and Spouse B each deposit a set amount on a monthly basis into the joint account. They otherwise pay for their own expenses out of their individual accounts.
Spouse B obtains Spouse A’s individual bank statements and they look fine, save for one $500 transfer to Bank Account #1234. Spouse B has never heard of Bank Account #1234 and doesn’t have any statements for it. That is almost certainly a problem.
In reviewing bank statements, I am always looking for transactions and transfers between bank and credit card accounts. If I have one transfer to Bank Account #1234 and no statements, I know that I have a hidden account that may or may not be of value to my client. Nonetheless, I need statements for #1234 and for all accounts and credit cards that receive money from, or send money to, Spouse A’s individual bank account.
The significance is not in the size of any discovered transfer or payment, but rather its existence. Bank statements almost always show the last four digits of any account sending or receiving money from the account in question. That means a transfer into Spouse A’s individual account will be identified by the last four digits of the sending account (and likely the bank name) and that a transfer out of the account will have the same information. Likewise, payments to credit cards will show the type of card and account number.
I think it’s smart for anyone in a divorce to give a very detailed, line-by-line review of every financial statement they can obtain for the 12-24 months prior to the divorce or separation. If the parties are proceeding amicably, it’s best if the review is done by agreement to potentially limit the expense of discovery.
Cash Withdrawals Add Up
It goes without saying that we live in an increasingly cashless economy. Credit cards, Venmo, Paypal, and the like have greatly reduced our need for cash. There are plenty of occupations that receive substantial cash compensation, but they represent a small minority.
If there are sizable cash transactions in any account, whether deposits or withdrawals, follow up questions are in order. Cash deposits raise questions about the source of the income. If an employer has chosen to pay an employee entirely in cash, there are reasonable concerns about that employer’s record-keeping and the accuracy of any subsequently produced 1099 or W-2. If there are sizable cash withdrawals, the questions of why and where need to be answered; why did Spouse A withdraw so much cash and where did Spouse A spend or deposit it?
Cash transactions should be scrutinized unless they are in-line with the parties’ lifestyle and habits during the marriage and both spouses understand how and why the money was spent.
Watch Out For Missing Expenses
Let’s say Spouse B has obtained all of Spouse A’s records. Everything looks good and the deposits in Spouse A’s account are all consistent with what Spouse A has said about her income. However, Spouse A leases a car and there is no one car lease payment on any of the produced accounts. This means one of two things: either Spouse A is not paying her bill or Spouse A is paying her bill with an undisclosed source.
Once we have complete records of all sending and receiving accounts and have a handle on cash transactions, we need to review all transactions to see if (1) they include or leave off any expense we know the party has and (2) the listed expenses are consistent with the account holder’s representations of income and expenses. In reviewing Spouse A’s transactions, it’s possible Spouse B can discover charges for expenses that raise further questions. In short, every transaction must make sense and every expense must be accounted for.
Extra Scrutiny For Extra Confidence
Every transaction on every page of every statement needs to be read. The only way to be absolutely confident that nothing has gone unnoticed is for nothing to go unread. Depending on the complexity of the finances and the number of statements, this can be a tall order. However, it is absolutely necessary when there’s a reasonable concern about inaccurate financial reporting.
What To Do If You Believe Your Spouse Is Hiding Money
My two suggestions would be to obtain and store as many records, statements, and the like as you can easily (and ethically) obtain and to hire an attorney. I think my office is pretty good at handling these issues, but I might be biased. We are always happy to discuss your case and can be contacted here.