By Martin Sliwinski, Divorce and Family Law Attorney
When getting divorced, it’s normal to have many questions about dividing assets, figuring out child support and determining spousal maintenance. If your former spouse has a higher income and earns it through a cash-based business, all of this can be slightly more complicated.
Luckily, there are methods in place to ensure that you receive the assets and support you deserve—and our team can help you navigate every step of the process.
What is a Cash-Based Business?
A cash-based business is a business that primarily or entirely operates on cash transactions. This includes laundromats, street vendors, small restaurants, barbershops, construction work and babysitter services, just to name a few. Cash transactions are not limited to only receiving cash as payment; cash-based businesses may also pay their employees and bills in cash as well.
There is nothing fundamentally unethical or illegal about only accepting payments in cash. However, some may be skeptical as to how much income is reported, and if it’s reported accurately. If you operate a cash-based business, your spouse may be skeptical during divorce, as their maintenance and child-support depend directly on the accuracy of your business’s financial records.
What Makes Cash-based Businesses Difficult to Trace?
Cash-based businesses are treated the same as any other business and are required to report their income on their tax returns. There is a cloud of concern over these cash-based businesses because by failing to take payments on credit (by credit card for example) they self-limit their own potential income.
For example, many individuals are used to paying for everything by credit card and don’t regularly carry cash, a trend more common with younger individuals. A cash-based business would lose out on the income from that type of client.
There are a handful of reasons why a business would still assume this risk; namely, the business may not wish to pay credit card transaction fees, deal with bounced checks or wait for checks to clear.
What makes these businesses difficult to trace in a divorce is the same reason why these businesses are often subject to higher scrutiny of the IRS for audits: there is a concern as to underreporting of income. The IRS and the courts expect that cash-based businesses record their transactions and are able to calculate their gross income and gross liabilities.
This is substantially easier when financial records are kept digitally, and transactions are automatically memorialized with transactions of credit. The transactions are also recorded by both the merchant and the customer, which is not always true of payments made in cash. It is much more difficult for a transaction to get lost in a company based on digital records rather than cash alone.
Most importantly with cash-based businesses, there is a question of fraudulent transactions. The fundamental question is whether the cash-based business is pocketing cash, or if the cash-earning spouse is pocketing cash instead of depositing it into a joint account.
This is a frequent concern in divorce where emotions and tensions are high. There is commonly a fear that the spouse is hiding assets—namely cash—to spite the other party.
How Does One Calculate Maintenance and Child Support with a Cash-Earning Spouse?
There are tools available to divorce attorneys to counter the aforementioned concerns. It is not as simple as looking to a tax return, a W-2 or a paystub. After all, a spouse may pocket a monthly cash payment and it would not show up on any of these documents. Proving that cash is missing is admittedly difficult but not always impossible. Here are three common options:
- Looking at all withdrawals and deposits on all accounts. If cash isn’t reported on taxes, but is still deposited into a bank account, then the bank statements can serve as a method to track incomeOne can look at all the monthly deposits in a given year, add them up, and attempt to attribute a similar yearly amount onto a party as income. One can also examine the debts—which are typically tracked by loans, notes or credit card statements—and determine how the debts are paid. If the debt and expenses paid are greater than the deposits, the remaining discrepancy may be answered by cash.
- Discovery requests and discovery tools. You can issue a Request to Admit, Matrimonial Interrogatories, and/or a demand for a Financial Affidavit from your former spouse.All of these documents require your spouse to put in writing, under oath, the amount of cash on hand as well as the amount of cash received per month. (And lying under oath would subject the party to the criminal penalties of perjury.) On that note, an attorney can take the deposition or testimony as a witness at a hearing, whether of a party, or potentially their employer or employees.
- Imputation of income. If a party is touting a luxury vehicle, mansion and various vacations per year with little income reported on taxes, this dichotomy is going to raise questions in court. The answer to those questions may be cash transactions. The court is certainly able to impute income onto a party for questionable practices when it is unable to cleanly ascertain income. In this scenario, the court could impute income onto the party that would match their lifestyle and range of expenses.
Contact Our Divorce and Family Law Firm in Evanston, Chicago and Lake Forest
If you’re worried about dividing assets and determining support as you divorce someone running a cash-based business, contact our team. We’ll support you through the complex financial processes and ensure that you’re receiving the money and support you deserve upon the dissolution of your marriage.