Page 54 - Family Law Services

• Reimbursed business expenses

• Gains derived from dealing in property

Nevertheless, it is not uncommon for states to look at the parties’ cash flow, rather than the income re-
ported on their income tax returns. In addition to the obvious noncash expenses, pass-through income
needs to be examined when calculating cash flow to determine whether the parties received actual cash
distributions or whether they just reported their portion of the noncash net income that must be recog-
nized on their income tax returns. Conversely, if there was a reported pass-through loss, a determination
may have to be made about whether it was only a paper loss or whether it represents a loss of cash flow.
State case law should always be reviewed when determining cash flow and income from pass-through
entities because the rules can vary dramatically from state to state.

The CPA may be asked to examine a business’ financial records to determine the amount and purpose of
expenses that may provide a personal benefit to one or both of the parties, which are commonly referred
to as perquisites. These expense categories might include travel, meals, entertainment, subscriptions,
transportation, charitable contributions, and retirement benefits. More subtle examples may include per-
sonal legal fees and other expenses that provide a personal benefit that may be more difficult to find
within the books and records. Perquisite analyses require the use of forensic accounting skills. To the ex-
tent that these types of items are identified, they may be included in income or cash flow for purposes of
determining the appropriate amount of spousal or child support, or both.

An engagement that includes the possibility or allegation of unreported income requires special care on
the part of the CPA. Most CPAs who assist with divorce engagements will encounter this circumstance.
If it occurs, the CPA must understand that this assertion may be an accusation of a criminal offense. As
a result, it is recommended that, upon the first notification of the possibility, the CPA should contact the
engaging attorneys for guidance about how to proceed. The CPA may want to recommend consultation
with attorneys having special expertise in taxation and criminal matters. It is not unusual for the attor-
ney(s) to recommend the expert be engaged by counsel, rather than the client, in order to try to preserve
the confidentiality of the CPA’s work product under the attorney-client privilege. In other instances, the
parties may pursue mediation, arbitration, or another option to resolve the matter out of court. If pursued
in court, the judge may be required to report the individual that omitted the income to the appropriate
federal and state taxing authorities.

Child Support

Child support payments paid by one parent to the other parent are not deductible from the payor’s in-
come or includible in the payee’s income under Internal Revenue Code (IRC) Section 71(c)(1). Pay-
ments are considered child support for tax purposes if they are either designated in the divorce or separa-
tion agreement or deemed child support under IRC Section 71(c).

Child Support Guidelines

All states are required by the federal government to establish child support guidelines that detail the
amount of support that a custodial parent may receive when divorcing the child’s other parent. These
guidelines are usually based on the respective income of the parents, the amount of time the children
spend with each parent, and any extra or extraordinary expenses each parent may incur on behalf of the
children.

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