Hidden Income

Lawyers and judges are certainly interested in discovering hidden income in divorce and child support cases. Sometimes there are clues to hidden income in tax returns and financial records, but cash can be hard to track down. Some people work under the table, earning cash that they never deposit in the bank or report on their tax returns. Some workers earn cash tips. Certain kinds of businesses handle a lot of cash, like coin laundries and pizza shops. And some businesses, believe it or not, keep two sets of books: the one they show the IRS, and the real set.

Forensic accountants have techniques for discovering hidden income in divorce and child support cases. Take the example of the pizza shop that handles a lot of cash. If you count the number of pizza boxes they use, you might be able to estimate how many pizzas are sold, and how much profit the business should be making. If there is a large mismatch between a company’s profits and its expenses, that can be a clue that something fishy is going on.

What happens when lawyers or judges discover hidden income in divorce or child support proceedings? In some states, such as Michigan and New Jersey, family court judges are mandatory reporters when tax evasion comes to light. They have a legal duty to tell the IRS about hidden income in divorce and child support cases. Clearly, that’s a problem for the guilty spouse who earned the hidden income, but it can also be a problem for the innocent spouse. Did they file joint tax returns? If so, read Chapter 21 of my book, which deals with interest, penalties and tax crimes; and also Chapter 11 about relief from joint tax liability.

When hidden income is uncovered by a family law judge, the IRS might perform an examination or audit; and if taxable income was not reported, the IRS can assess a deficiency, including taxes, interest and penalties. If the missreporting was egregious, there may be criminal penalties. Even the spouse who did not work in the business might be held responsible.

In most jurisdictions, the family court judge has discretion to either report or overlook misstatements on tax returns. When you are representing a taxpayer who has underreported or misrepresented income, consider whether you can amend the prior years’ tax returns, which might resolve the tax problems and also rehabilitate the client’s credibility in court.

For family law help in Western Pennsylvania, call me. I’m Brian Vertz, and for more than 25 years, I’ve represented business owners, entrepreneurs, pro athletes, and professionals. I’ve represented all kinds of people with complicated child support and divorce issues. My law firm is a powerful team of lawyers dedicated to family law. In Pittsburgh and Western Pennsylvania, call me at 412-471-9000