In this chapter we discuss the documents needed to perform a lifestyle analysis and how those documents are used. We have already talked generally about financial documents that are used in divorce and child support cases, but here we will talk about their relevance to the lifestyle analysis. In later chapters, we will focus on specific types of income or assets and, more specifically, how the documents are used to investigate those items.
This book does not discuss the basics of accounting, as our focus is very narrow and our space is limited. It assumes you have a basic working knowledge of income taxes, financial statements, and accounting terminology. Miles Mason, Sr., JD, CPA, covers the topic of accounting for lawyers thoroughly in The Forensic Accounting Deskbook. An entire chapter is devoted to discussing financial statements, basis of accounting, general ledgers, and audits. Mr. Mason’s book covers all sorts of information on working with financial experts and dealing with financial issues in divorce, and it is an invaluable reference tool for family lawyers.
Following are some of the most common financial documents utilized in family law cases, with a discussion of information they can provide about income, assets, liabilities, and expenditures.
Income Tax Returns, W-2s, and Current Pay Stubs
An individual’s income tax returns (Form 1040), W-2s, and current pay stubs are the most common and basic documents evidencing income. Included in Appendix A is a sample of a 2017 personal income tax return (Form 1040) and a sample of the 2018 form along with Schedule 1 and Schedule A (itemized deductions). You may notice that the line numbers on the new Schedule 1 correlate to the line numbers on the old Form 1040, presumably to reduce confusion. The forms changed when the Tax Cuts and Jobs Act of 2017 went into effect, but nearly all of the same information is being captured in the income tax filings as before.
The income tax return will provide information on the following sources of income. This list includes some pointers on ways the items can be analyzed to search for hidden income and hidden assets.
- Wages – The figures reported on the income tax return should be matched to the W-2. The W-2 and the pay stubs provide additional information on the employers, pay rates, total pay, retirement account contributions, certain benefits, and taxes withheld. It is important to determine whether the wages reported on the W-2 are truly gross wages, or if the wages have been reduced by retirement contributions. If retirement contributions were subtracted to arrive at gross wages on the W-2, it is important to do the math to arrive at the actual gross income prior to any deductions. Additional analysis may include tracing bank deposits to ensure that all wages were used for the benefit of the family.
- Taxable interest and tax-exempt interest – These items of income must be considered when calculating income available for support. They are also important because they can point to bank, investment, and brokerage accounts that may not have been specifically disclosed in the family law case.
- Dividends – Like interest, dividends must be considered in calculations of income available for support and can point to bank, investment, and brokerage accounts that may not have been disclosed.
- IRAs, pensions, annuities – Any activity on this line should be evaluated to determine if all retirement accounts have been disclosed and considered.
- Social Security benefits – Two figures are reported for Social Security, the total amount received and the taxable amount. The total amount received is the important figure for an analysis of income.
- Taxable refunds or credits – Refunds should be examined to determine if they were shared by the parties, and the expert should evaluate whether a spouse is having unusually large amounts withheld from paychecks. This could be a technique used to hide funds until after the divorce is final.
- Alimony received – This item relates to a prior marriage and will likely not be a factor in the current marriage and divorce.
- Business income or loss – Income on this line comes from Schedule C, which form shows income or loss from a sole proprietorship or single-member limited liability company (LLC). Chapter 12 covers the business lifestyle analysis, so information on this line item will be found there.
- Capital gains or losses – Along with interest and dividends mentioned previously, this portion of the income tax return can point to assets in investment and brokerage accounts. Information on this line is from Schedule D.
- Other gains or losses -This line item often relates to sales of property used in business, so it should be evaluated to determine if other assets or income streams exist. Income on this line can come from several different schedules.
- Rental real estate, royalties, partnerships, S corporations, trusts – These items should be investigated in the same way as many business interests. Refer to Chapter 12 for information regarding the business lifestyle analysis.
- Farm income or loss – This item is also a business interest that should be investigated using the methods detailed in Chapter 12.
- Unemployment compensation – Information about unemployment benefits should be used in conjunction with wage information to determine if all of the income benefited the family.
- Other income – Many types of income could fall under this category, so any income reported on this line on the income tax return should be carefully evaluated. Schedules and attachments to the income tax return will indicate what the income is.
Also included in this chapter:
Business Financial Statements
Personal Accounting Records
Other Miscellaneous Documents
What Is Proof?