Chapter 9 – Hidden Income


Finding hidden sources of income is important as it relates to spousal support. However, the discovery of income streams can also influence the division of assets. If one spouse has a larger income stream than previously disclosed, that spouse may not need as large a share of the assets divided during divorce. Clearly, the discovery of hidden income can significantly impact the financial outcome of a divorce or child support action.

Support calculations and asset divisions are fairly straightforward when spouses only have wage income from jobs at companies that are unrelated to the spouses. The income is verified with a W-2 or income tax return, and there is nothing complicated about the calculations.

The calculations are more complex when a spouse is self-employed, has an unusually close personal relationship with the employer, works in a position with nonwage compensation such as stock options, owns income-producing real estate, owns multiple businesses, or receives income from trusts or other entities. In these more complicated situations, a search for hidden sources of income should almost always be done.

Methods to Hide Income

Some of the most common methods of hiding income on a personal level are discussed next. In Chapter 12, we discuss how a spouse may hide business revenue.

Underreport Income on Income Tax Returns

Since income tax returns are a common starting point for analyzing income available for support, income may be intentionally underreported on the tax return. The government has certain procedures in place to prevent underreporting of income, but business owners and investors have ample opportunity to lie about their income. It is common in a family law matter to accept the tax returns as the truth, but in certain cases this is a dangerous tactic. In cases in which one spouse knows there was manipulation of figures, it is especially important to validate the numbers.

Use Offshore Accounts

Offshore bank and investment accounts are used by spouses to hide both assets (the account balance) and income (the money coming into the account on a recurring basis). It may be difficult to find overseas accounts, particularly if the accounts are opened in a country known for banking secrecy. If the accounts are found, the even bigger hurdle is finding a way to seize funds belonging to the marital estate. Hiding money overseas is attractive because of the difficulty in locating and acquiring the funds, both because it takes so much time and effort and because there may be a great cost in doing so.

Also included in this chapter:

Methods to Hide Income
Methods to Uncover Hidden Income
Other Complicated Income Sources
Income Disguised as Expenses
Undistributed Income
Proof of Income via Expenditures
Sample Expenditures Method
Basis for the Analysis