Calculating Income

Hiding Income at the IRS

One of the most important tasks in a divorce involving child support or alimony is to calculate each party's income. The figure becomes a starting point for determining how much (if any) a party should pay.

Sometimes, the danger of one party hiding income is obvious. Think of the self-employed sole proprietor who doesn't have employees or keep good books. Every sensible person would be skeptical of that person claiming they suddenly went broke two weeks after being served with divorce papers.

But what about W-2'd employees who work for large companies? Should people worry about them too?

Yes.

There have been cases where people increase their tax withholding at the time of a pay raise. The effect being that their "net pay" remains the same every two weeks even though they are earning more. Essentially, they are "saving" money in the U.S. Treasury, which will be refunded to them when they file taxes the next year.

A small business owner could do the same thing by overpaying estimated quarterly taxes.

What should you do to make sure this isn't happening to you?

First, demand to see copies of payroll check stubs showing gross income per period and cumulative gross income earned for the year-to-date.

Second, never rely on a person's W-2 Form as evidence of income. Some contributions (e.g., retirement) can reduce a person's "income" but be hard to spot on the form. I remember one case where this changed a person's income by more than $10,000 per year.

To be safe, demand to see the person's last payroll check stub showing total gross income earned that calendar year.

Also, ask for a copy of the person's Social Security Statement and compare the Medicare / Social Security Wages against the numbers the person claims to have earned.

Determining a person's income can be harder than it sounds. In really tricky cases, I always hire a forensic accountant.

Stay strong,

Rob