There is a not too uncommon phenomenon that is frequently seen in divorce cases. Specifically, as soon as the notion of a divorce action become a reality, many supporting spouse’s incomes suddenly, and usually without valid explanation, drop substantially. It may come as no surprise that someone may want to manipulate their income when an alimony or child support obligation is about to be set. This affliction is sometimes known as "R.A.I.D.S." or Rapidly Acquired Income Deficiency Syndrome (sometimes also known as "SIDS" Sudden Income Deficiency Syndrome.) In fact, income reduction during the year of a divorce is so common for a self employed individual there is a natural skepticism about it.
I did a blog on this phenomenon in May 2008 and was recently asked for permission that it be reproduced for publication for an CLE program in Indiana. That cased me to look at it again and update it below.
As noted then, there are times when there are valid, legitimate and explainable deviations in someones income. Some people are in commission sales and one year is legitimately better than another. Perhaps someones income is tied to real estate. Back then, I gave the example that a person may have a legitimate reason why 2007 and 2008 were down years, citing mortgage bankers and realtors as people who were probably hurting then. Those people are probably still hurting as are commercial real estate brokers, builders, contractors and other people tied to the real estate industry. Since that time, Wall Street has changed substantially. While the market is now coming back, there has been much turmoil in the last two and a half years and many have gone through job changes. Some medical professionals are working harder and making less. Accountants that worked with small businesses may have fewer clients and lower revenues in light of the recent recession.
At the time of the original blog, I talked of a recent where if you looked at my client’s tax returns and W-2s, one would think that support should have been based upon a seven figure income as opposed to a mid-six figure income. In this case, there were some discrete one time payments from exercises of stock options and change of control of companies that he worked for. (As it turned out, his subsequent income was more in line with the lower number as opposed to the higher number, justifying our excluding the non-recurring income from consideration).
Situations of legitimately fluctuating income were not what I was talking about. In fact, when there is non-recurring income, it may be legitimate to back it out for purposes of computing support or else the support would not be fair to the payor. When income legitimately fluctuates from year to year, the Child Support Guidelines and decisional law suggest taking an average (3 or 5 years is common).
The cases that I was talking about are those where there is no explanation for the sudden drop in income. Very often, this occurs when the supporting spouse is self employed. There are many ways income is hidden. Sometimes, it is just not collected – as possibly evidenced by a large rise in accounts receivable. Sometimes, there may be several capital expenditures or large equipment purchases, which reduce the profits and thus the income. Other times, perquisites or personal expenses paid by the business increase dramatically. Check the business credit cards – they are often illuminating in this regard. Cash is also a possibility as are other manipulations with payments received. We have a case now where we suspect payments to a third party to divert a spouses income. Sometimes a person’s loan account and/or cash at hand increases without explanation suggesting that money is being left in the business for no reason.
In these cases, discovery is critical to smoke out the true income and real reason for the alleged reduction in income. The use of a forensic accountant is often essential to get to the correct income number.
RAIDS is certainly an illness that can be diagnosed and with the proper team of lawyers and experts, cured so that the supported spouse is treated fairly.