How Does Underreported Income Affect a Divorce?

By Beverly Bird

In community property states, income is a marital asset. One spouse might earn it, but both have an equal right to it. Equitable distribution states treat marital income in much the same way. It affects virtually every aspect of a divorce, so both spouses may have a great deal to gain by telling the court they earn less than they actually do. However, if a court discovers the misrepresentation, the judge can punish the lying party by imposing sanctions -- anything from ordering him to pay the other spouse's attorney's fees to not allowing him to argue against the other spouse's requests at trial.

In community property states, income is a marital asset. One spouse might earn it, but both have an equal right to it. Equitable distribution states treat marital income in much the same way. It affects virtually every aspect of a divorce, so both spouses may have a great deal to gain by telling the court they earn less than they actually do. However, if a court discovers the misrepresentation, the judge can punish the lying party by imposing sanctions -- anything from ordering him to pay the other spouse's attorney's fees to not allowing him to argue against the other spouse's requests at trial.

Child Support

The goal of child support is to ensure that children live as well after their parents' divorce as they would if both parents' incomes continued to come into the same household. After divorce, the custodial parent pays for the children's needs directly by making rent or mortgage payments and purchasing groceries and clothing. The non-custodial parent pays his share of the children's needs through child support payments to the custodial parent. When a custodial parent underreports her income, the non-custodial parent's child support obligation usually increases. The children's financial needs are the same, but the custodial parent doesn't contribute as much to them so the bulk of the responsibility falls to the other parent. If the non-custodial parent underreports his income, his support obligation usually goes down.

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Spousal Support

The idea behind spousal support, or alimony, is to make sure both spouses enjoy a similar lifestyle post-divorce, especially after a long-term marriage. If one spouse earns $100,000 a year and the other earns $30,000 a year, a judge might order the higher-earning spouse to pay the other spouse $35,000 a year in spousal support -- half the difference between their earnings. As a result, both spouses would live on $65,000 a year. Many factors contribute to whether a judge orders spousal support, and judges usually do not base their decisions on income alone. However, if a judge does order alimony, and the higher-earning spouse underreports his income, it can make a significant difference. For example, if he claims earnings of $80,000 rather than $100,000, he might only have to pay his spouse $25,000 a year in spousal support, saving $10,000 on his alimony obligation.

Property Division

Income can also affect property division, especially in equitable distribution states where judges decide the allocation of marital property in a way that seems just and fair. Judges can take many factors into consideration when deciding this, but a common issue is whether the spouse with lesser income can afford to purchase and replace certain assets post-divorce based on her income alone. For example, a spouse who earns only $30,000 a year might have a hard time qualifying for a mortgage to buy her own home. A judge might be inclined to give her the marital home to compensate for this, even if it means she receives more than 50 percent of the total marital assets. A spouse who earns a very good income might not receive as much marital property because the judge figures he has the ability to replace it. In both cases, if a spouse underreports their income, it could result in unfair distribution.

Finding Hidden Income

Unless a spouse owns a business, the divorce procedures in most states make it very difficult to underreport or hide income. Divorce involves the exchange of tax returns and financial affidavits that detail budgets, income, assets and debts. Unless a spouse cheats on her taxes, all sources of taxable income should appear on her return. If a spouse reports income on her financial affidavit that is insufficient to meet her monthly budget, it's usually a safe guess that extra unreported income exists. However, examining her debt can be important in this case, because she might, for example, be meeting her monthly expenses with a credit card.

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What Are the Treatments for Jointly Held Assets in Divorce?

References

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New York Divorce Laws on Property Distribution With the Length of Marriage

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