A divorce is difficult for many people. Working through the property division and other decisions that have to be made can be challenging. For people who have a small business, there is another layer of complexity.
You need to be sure that everything that’s being reported is accurate. There is a phenomenon that sometimes manifests that makes things complex – sudden income deficit syndrome. If you are facing the end of your marriage and your spouse runs their own business, consider these points:
What is sudden income deficit syndrome?
Sudden income deficit syndrome occurs when the spouse handling the business’ finances changes the records to make it appear as though the revenue isn’t as great as it really is. This can be done in a variety of ways, including not recording cash payments or diverting money to non-existent companies or employees.
If one spouse isn’t really hands-on with the company, it might seem easy to alter these records. Still, this is illegal and shouldn’t be done.
Why do people do this during divorce?
When a person decides they are going to file for divorce or learns that their spouse already filed, they begin to protect their interests. The business owner may think they need to hide income to avoid parting with as much in assets or make support payments higher than they are comfortable with.
Some individuals will begin to taper off the business’ recorded income long before the divorce is filed. They know a sudden drop in revenue will be obvious and will require explanation. Of course, this is not true if the person is not thinking about divorce.
How can it be prevented or discovered?
The only way that this can be prevented is if both spouses take an active role in the business’ finances. If you haven’t done this and are going through a divorce, a forensic accountant may unearth signals that sudden income deficit syndrome has occurred. This might be done through lifestyle observations that show your ex is living in a manner inconsistent with the business income they’re claiming. It might also come from public records or through the review of financial statements.
Being truthful during the divorce process is a must. Deceit can lead to serious penalties. You must also ensure that you are protecting your own interests throughout the process.