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Uncovering Hidden Income: A Deep Dive into Determining Unreported Income in Divorce with CPA David Cantor

• Launi Sheldon and Guests

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Ever wondered how a family court unravels the enigma of unreported income during a divorce? Join me, Launi Sheldon, as I sit down with veteran CPA David Cantor to shed light on this perplexing issue. With over 30 years in the field, David reveals that unreported income goes beyond mere tax evasion, playing a pivotal role in support and alimony calculations. We discuss how legitimate tax-saving strategies can sometimes veil the actual financial standing of a business, and why courts are more fixated on the reality of what's coming in rather than the numbers that are reported. This episode peels back the layers on how family law assesses income, and why understanding the full financial picture is crucial for fair outcomes.

As we unravel the financial threads within legal disputes, the spotlight falls on the meticulous work of forensic accountants— like David who comb through records to detect hidden income. These financial sleuths craft detailed reports critical to the courtroom, laying out facts without assuming the reasons behind them. David's firsthand experiences in providing testimony illustrate how the raw data they uncover paints a picture, leaving the interpretation of hidden motives to the legal professionals. Tune in for this captivating conversation that promises to not only educate but also challenge your perceptions on the intersection of finances and family law.

You can reach David Cantor at:
https://dscfac.com/

You can reach Launi Sheldon at:
Launi@LearnLawForAll.com

Launi:

Hi, I'm Launi Sheldon, with All Things Divorce and Learn Law for All. Today I have David Cantor with me. David Cantor is a CPA and he has spent what since 1988, he's been a CPA and he's mostly, or has been exclusively family law since 1999 in California and Arizona. He is accredited with business valuations through the American Institute of Certified Public Accountants, so that is a national company. He's testified about 250 times in family law matters and he provides really great reports that you can use for exhibits. So, david, thank you so much for being here.

David:

Oh, thank you, Launi. Just to clarify I actually started family law accounting in 1990. So, it's not that easy to shave. Nine years off my life.

Launi:

Oh, what did I say?

David:

99.

Launi:

Oh geez, I'm sorry. Yeah, so it's been a long time.

David:

Yeah, it's been a long time.

Launi:

Okay. So, as a disclaimer, I'm only licensed in Arizona. David is recognized nationally, but a lot of the things that we talk about are really relative to Arizona, but can be used throughout the country. Listening to this podcast is not creating an attorney-client relationship or a CPA-client relationship, and it's not meant to give specific advice to your situations. It's just to kind of help give an overall, broad understanding. Today we're talking about what unreported income is and kind of how to find it, so we did do a continuing education on this that will be available on the LearnLaw for all website. So, david, again, thank you for being here and tell us what is unreported income.

David:

So unreported income is not necessarily the same as tax fraud. When you're working in a divorce situation whether it be valuation or income to determine support or alimony you're looking to see what the true monies available to the pay or spouse or the business owner are, by looking at expenses that are deducted on the books and records that aren't necessarily business related, or revenue that never made its way to the books and records and therefore was unreported. So you're trying to figure out how much does the business really make? And there are other things too, because there are certain types of expenses that are truly legitimate for tax purposes but can manipulate or misstate the true income.

David:

For example, if a business says okay, I'm getting divorced, I know I'm going to have to pay support, so what I'm going to do at the end of the year is prepay all my rent or prepay my leases or prepay all my credit cards. Well, yes, for tax purposes that's fine and it's going to show lower income. But, as a forensic accountant, the way the family law courts look at it usually is what's really the ordinary course of business? You don't ordinarily prepay your expenses, you don't ordinarily pay down your liability. So let's look at what the ordinary income and expenses are and we're going to look at that not what you actually did.

Launi:

So just based on what you just said, then it's not always tax fraud if there's unreported income. Unreported income doesn't necessarily equate to tax fraud. Is that right, correct?

David:

Unreported income I'm referring to for use in family law courts, not for tax purposes. Many times the unreported income that I find was in fact unreported for tax purposes. But unreported income doesn't always mean tax fraud. It doesn't always mean unreported income for tax purposes. As I say, the courts are looking to figure out how much he truly makes for a representative period for which to pay support. So we're making adjustments potentially for that purpose, not necessarily for tax purposes.

Launi:

So what percentage of cases that you work on, would you say, have unreported income?

David:

On cases where I'm dealing with either income or business valuation, there is a lot, probably over 50%, but again that doesn't mean they're all tax dropped. It means that there were expenses paid that we need to adjust out. Now if you're asking, okay, how many times today completely cooked the books or not reporting income, that's probably a lower, a pretty low percentage. Nowadays it's harder with the ads out there and the methods of paying a business credit cards payment through ads, things like that there's not as much cash going back and forth, so it's become a little more difficult for business owners to hide cash. Not saying it's not impossible anymore, it's out there and there are ways to do it. But probably of the cases that I work on where I'm dealing with income, either valuation or support, maybe 10% have the true manipulation of the books to hide revenue from both the IRS and the spouse.

Launi:

Now I know we didn't talk about this question, but do you ever find that maybe the spouse was in on it until the divorce? There was knowledge and possibly even more than knowledge, agreement and help in doing that, and that's maybe how they even know that it's there and hidden.

David:

That happens. Yeah, the spouse, who now is what's referred to as the outspouse and non-business owner, says yes, here's what we always did For my purposes. It helps me quantify what the true income is. And then it's up to the core to decide well, you're complicit. You can't sit there and say I'm innocent. And then, if I'm on a different issue, if the IRS were to come in, that spouse can't say innocent spouse, they didn't know because they knew.

David:

But whether you knew or not, the ultimate goal was to find out what the true income is and how it was accomplished, and so that the court can make an informed decision saying, okay, the business makes X amount of dollars. Therefore, that's going to base my support on. Because, if you look at the other way, spouse knew that they were getting. The business owner was giving himself a paycheck. But it's the other things that, whether it's kosher or not, I don't know, that's kind of not convenient to determine. I'm not the IRS, I don't follow the IRS when I find this stuff, but my goal was to present the accounting to the court to make a decision, or to the attorneys so they can mediate or settle the case.

Launi:

So when you testify, then is that something that you testify about? You kind of testify about what you found? Do you ever testify if you think it was like a purposeful type of hiding, or you just say, look, this is the income and you're not making any judgments?

David:

Yeah, I'm not going to testify to intent. The client needs to testify to that or the spouse needs to testify. I'm just testifying to here's what I found. I'm not sitting there so concerned and addressing why they did it, I'm just saying here's what I found.

Launi:

And so when you find that, do you create a report?

David:

Yes, I start with schedules to figure out what's going on, and once I've determined that something's going on, I talk with the client and the attorney and say, ok, what's the next step? And if it's going to trial or even mediation, I'm then asked to prepare the report. So I prepare the report and then, if it does go to trial, I will testify to that report.

Launi:

Great Well, thank you so much. I appreciate you being here. I think that it's you have a wealth of knowledge in your brain. I'd love for you to come back and talk about some of the other subjects that we're going to do the educational videos on.

David:

Absolutely.

Launi:

All right, thank you, david Thanks.