In some support cases or divorces we encounter a situation where a party is self-employed or has cash income and they fail to report all of their income on their income tax returns. In these cases it is a real challenge to prove what their true income is.
There are a few ways to deal with this issue. All require significant preparation.
One way to address cash or unreported income is to look at what the party spends. If they spend more than they say they earn and there is no corresponding debt or reduced savings, then there is a basis for a court to find that they have some unreported income. Another way to look at this type of situation is to look at how much cash a party spends versus how much cash they should have based upon their bank records.
This is what the Court did in Moldonado v. Moldonado (2012 N.Y. Slip op. 07564 App. Div. First Department, Nov. 13, 2012). In that case the trial court imputed tip income to the husband and found that he was earning more than he reported on his income tax returns. The court based its decision upon the evidence that showed that his total cash expenditures greatly exceeded the total of his cash withdrawals from his bank accounts. The First Department of the Appellate Division affirmed this decision.
The Husband also had presented expert financial testimony. However, the simple fact that he spent more cash than his bank records showed that he should have had indicated that he had cash coming from somewhere else. The court thereby was able to impute additional unreported earnings and reject the testimony of his financial expert.
On top of that, the court found that the husband had prolonged the trial by providing false and misleading information to his financial expert. This formed part of the basis for an award of counsel fees to the Wife.
The key to this was that the Wife’s attorney had obtained the Husband’s bank records and took the time to analyze them. This is not easy or cheap, but it is very effective and good lawyering.