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Cash Businesses and Divorce

After Colorado instituted Amendment 64 in early 2014, a profitable industry sprouted up around the legalization marijuana. However, despite these new businesses generating roughly $3 million in state taxes in January 2014 alone, they have encountered serious problems with reliable accountability.

Because marijuana still violates federal law, banks remain hesitant to associate with marijuana businesses. This has forced many Colorado shops to remain cash-only businesses which, tax collectors worry, may result in understatements of sales and income. If this occurs, Colorado could be short-changed on a large portion of taxes.

In fact, most cash-only businesses lend themselves to potential fraud. This can have damaging effects not only for tax collectors, but also for litigants in a matrimonial action.

While child support is calculated differently by each state, spousal support depends on a variety of factors and is often up to the court. One key element that helps calibrate support is the spouses’ income, assets, and the total marital estate. Ideally, financial and tax records accurately reflect monetary resources and the need of both spouses. However, this is often not true—especially in cases involving cash-based businesses.

Cash-based businesses are enterprises where customers make a large percentage of payments in cash. These transactions have great potential for bypassing proper documentation and taxation. Property bought with cash can also help conceal unreported income. In a divorce, therefore, the suspicion of unreported income is potentially detrimental to a non-business-owner spouse and the couple’s children, and must be investigated.

The first step a non-business-owner spouse must take before divorce proceedings, if not earlier, is to become familiar with the cash-based business and its finances. Direct knowledge of the business’s income and expenses, as well as debts and assets, can give the non-business-owner spouse the advantage of spotting abuse. However, determining the total amount of money or the value of assets that have been hidden can require the skill of business valuation experts.

Family attorneys usually search for any potential fraud during divorce proceedings. They must review the methods used for imputing income to unveil any unreported income, or prove that the suspicions of non-business-owner spouses are valid. Yet, even with the proper documentation, owners may still be able to get away with fraud by understating income. In these instances, a forensic accountant who can analyze details and uncover hard-to-find inconsistencies is necessary.

Owing to their expertise, forensic accountants have many tools useful in the investigation of underreported cash-based income. One tool is a Lifestyle Analysis which reconstructs the spending habits, living expenses, and the standard of living of a couple during the latter years of marriage, prior to the divorce. You can learn more about lifestyle analysis in a whitepaper available on our website.

A detailed record of day-to-day expenses has the power of revealing inconsistencies between incoming money and spending. If the analysis reveals that expenses exceed income, then the next step a forensic accountant takes is to investigate what the unknown sources of income are.

To help estimate any unreported cash-based income, there are a variety of online resources and studies available that list statistics about common cash businesses. By analyzing this data, a forensic accountant can make informed estimations on the day-to-day revenue, combined income, and expenses of these businesses.

This approach discovers the mark-up of the service or product the business sells and compares it to the reported numbers. Further estimations can be achieved by studying the percentage of cash versus credit card receipts. Knowing the total number of transactions paid with credit can help estimate how much money might have been given out in cash.

In addition, examination of cash flow discovers how money comes in and who receives it. A business in which two or more people oversee the receipt, record-keeping, and the making of deposits has greater internal controls. If, however, the same person is responsible for these duties, suspicions may arise. When cash registers are used, forensic accountants can review daily tapes. In businesses where products are sold, they can compare the purchase orders to the reported sales. Lastly, payroll records can also give insight into the expenses of the business.

It is unlikely a non-business-owner spouse will not have a thorough understanding of the way the finances of their spouse’s business function. Even when a business belongs to both parties, the money manager often has the advantage in knowing the structure of the business and its finances.

During divorce proceedings, the income and assets of both spouses are the base upon which alimony and child support are determined. For this reason, it is important to consider the expertise of forensic accountants who can help spouses that may be harmed by any fraud, and who are unable to get to the root of the problem alone.

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