Tips on Determining Income of Spouse

A divorce often involves a spouse who owns an interest in a closely-held business. The closely-held business owner typically prefers to take money out of the company without paying taxes on the income. For this reason, the owner’s salary may be only a portion of the actual income he or she derives from the business.

The most obvious, as well as difficult to detect, method of underreporting income is for the business owner to “pocket” some of the cash. Since many small businesses do not have adequate accounting controls over cash receipts, it may be impossible to determine the amount of cash taken after the fact. The non-owner spouse is a good source of information on possible amounts of cash skimmed from the business. Such spouse may be aware of substantial amounts of cash kept in a safe deposit box or hidden under a mattress. The personal checking account should be examined. The checkbook should reveal payments for food, housing, entertainment, credit cards, etc. If the checks do not include typical expenses, it is likely that the business owner is using company funds to pay for these items.

Personal items, or “perquisites”, can amount to a substantial portion of the owner’s income, depending on how aggressively the owner handles his tax situation. The following list can be used as a guide in quantifying the amount of income from perquisites taken out by the business owner:

• Rental by the closely-held business of facilities or other property owned by the owner spouse
• Overpaid or non-working family members on the payroll
• Private school or college tuition for children
• Personal credit cards reimbursed by the company
• Personal entertainment, and food and liquor expenditures
• Retirement plans, including pension, profit sharing or deferred compensation plans
• Personal use of country club, including dues, initiation fee, and other expenditures
• Automobile-related expenses for cars driven by non-employees
• Medical, health, and life insurance costs
• Vacation expenses, including airfare, hotel, cars, and meals
• Personal gifts
• Utilities at personal residences
• Rent or mortgage payment on personal residence
• Repairs on, or additions to, personal residence
• Purchases of personal clothing, jewelry, furniture
• Upkeep costs of residence, including gardener, maid, butler, and cook
• Cost of vacation home owned by the company
• Expenses paid for vacation home
• Personal use of company airplane or boat
• Legal fees for divorce
• Interest-free or below-market interest rate on loans from the company
• Season tickets to sporting events, symphonies, or concert series