How Does Underreported Income Affect a Divorce?
Self-employed individuals and their spouses may find themselves tempted to minimize their incomes for tax purposes during marriage. Money passing under the table escapes regular income and self-employment taxes, providing the couple with thousands of dollars per year that they otherwise wouldn't have. For the divorcing couple, under and unreported income can cause serious complications for almost every aspect of their case.
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Property Division in Equitable Distribution States
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Community property states, which occupy the minority position, divide marital property and debt equally. Equitable distribution (ED) states, however, apply a rebuttable presumption that an equal division is equitable, or fair, but provide for an unequal distribution in the presence of certain statutory factors. The relative incomes of the parties is one such distributional factor; if one party has consistently underreported her income throughout the marriage, she may receive a greater share of the marital estate if the other party cannot prove her real income. This can be difficult, especially where a party signed tax returns knowing his spouse was not reporting all her income.
Child Support
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All states have guidelines that specify a method of calculating monthly child support for one party to pay the other. The incomes of both parties is one of the most important inputs into any child support calculation formula. As such, inaccurate income figures for either party can produce an inaccurate child support amount. A noncustodial parent who is unable to prove the other parent's real income in court may find himself paying inflated child support, while the custodial parent in the same situation may not receive enough support to meet the reasonable needs of the parties' children.
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Spousal Support
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The needs of the dependent spouse, her income and the ability of the supporting spouse to provide post-separation support and alimony are all critical factors in determining both entitlement to a spousal support award and the amount of that award. As with child support, inaccurate income figures can skew the court's ruling. Spousal support cases bring an additional twist, however; as the standard of living of the parties is a key factor in such determinations and parties bent on hiding income will often pay for things in cash, they may have a difficult time demonstrating their actual standard of living in court.
Proving Real Income
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Just because a party has consistently hidden income from the government during marriage doesn't mean he'll be able to hide it from the other party in divorce. An analysis of a couple's income tax returns or other records of reported income may reveal a discrepancy when compared against their demonstrated standard of living during the marriage. Additionally, a party motivated to minimize income to the IRS may maximize it on car loan, mortgage and credit card applications. While a party involved in a divorce case may be conscious of the dangers of reporting his true income anywhere after claiming something different to the IRS, such considerations would probably not have entered his thought process prior to the breakup of the marriage.
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