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Analysis of Income Available for Support

For a forensic accountant, this is probably the most often performed assignment. Usually an accountant gets involved when one or both parties in divorce proceedings have complex income streams and their disposable cash flow is not immediately determinable.

In general, what is considered “income” for tax purposes is also considered “income” for child and spousal support purposes. The familiar elements are: wages and salaries from employment, income from investments, net income from business or from a rental property, pensions, annuities, Social Security and unemployment benefits. Most of these items can have various components that complicate income analysis and make use of professional help advisable. Here are a few of the most commonly encountered difficulties:

Income From Employment quite often (at least in Silicon Valley) includes bonuses, commissions and equity compensation. It is possible that portions of these W-2 items do not represent income available for support and should be excluded from support calculations. An easy example is a bonus or commission received after the date of separation, but earned during marriage. In this case the bonus is community property and part of property division, not income on which support is calculated. Another example is equity compensation (restricted stock or stock options), which is earned over a fixed period of time and is received in in installments at regular intervals. As this equity is part of the employee compensation, its value on the vest or exercise date is included into the W-2 income. How much of this amount is community property and how much is income available for support needs to be determined based on the terms of the particular stock grant(s).

Income From Investments is not always just interest and dividends, it can be capital gains or distributions from partnerships and S-corporations. These items usually need special analysis to determine whether any of them should be considered part of income available for support.

Income From a Business presents another challenge. Most businesses provide owners with what is euphemistically called “fringe benefits”. These are personal in nature expenses paid for the owner by his/her business and included as business expenses on the business’ tax returns. These fringe benefits need to be determined and their value needs to be included in income available for support.

The work on this assignment starts with the review of both parties’ Declarations of Disclosure which include Income and Expense Declaration and Schedules of Assets & Debts. Based on this review and input from the client and his/her attorney, an accountant will prepare a document request that may include all sorts of documents, from tax returns and pay checks to restricted stock grants and loan applications. If a business is involved, its bookkeeping records will be requested and analyzed.

Depending on the complexity of income streams and cooperation (or lack thereof ) of the opposing party, the discovery process to obtain all documents required for calculations may take several months. It is not unusual to go through several document requests in order to obtain a good understanding of the income streams and assemble all the information necessary for the calculations.

Sometimes the same information may be obtained from different sources or various documents can be used in conjunction to compensate for missing records. For example, if bookkeeping records for a business appear to be incomplete, an accountant may ask for statements from bank accounts in order to determine unrecorded business income and expenses.

Divorce litigation can be a slow process and quite often there may be a need to update income calculations, which requires new rounds of document requests.

Because of the need to review and analyze lots of documents which may come from various sources, there is no easy way to make income for support calculations quick. Cooperation of the income earner in the process is crucial. It also helps to introduce the forensic accountant to tax preparers and bookkeepers and allow them to communicate and work directly with each other early in the process, starting with assembling documents for the income analysis. 

Copyright: Irina Anissimova, CPA, CFF, 2015

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