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BGBC: ‘RAIDS’ may be behind spouse’s drop in income

July 17, 2013
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By Howard I. Gross, Steven W. Reed, Erika M. Gowan and Casey L. Higgs

In family disputes, we’re often faced with a dilemma in which the supporting spouse’s income suddenly and/or dramatically decreases without valid support or explanation. In the valuation industry, this disorder is commonly known as “R.A.I.D.S.” or Recently Acquired Income Deficiency Syndrome. Your client’s spouse may have been diagnosed with this terrible affliction as a spousal- or child-support payment obligation is about to be set.

R.A.I.D.S. is most common in self-employed individuals and business owners because they have ownership and control of the financial records of the business, which makes manipulation possible. However, there are times, of course, where a decrease in income is legitimate. For example, the economic recession in 2008 took a toll on small businesses and many companies experienced a decline in profits around this time. Owners of construction companies, residential and commercial builders, and other companies in the real estate industry likely experienced a decline in profits during the recession. There also could be internal factors that cause a legitimate decrease in income. For example, a company losing one of its largest customers or perhaps one of its key employees is cause for a decline in profits. Both external and internal factors present may cause a drop in income to be legitimate.

When a drop in income cannot be attributed to such external and internal factors or may seem unjustified, R.A.I.D.S may be the culprit. The supporting spouse finds ways to hide or divert income so it appears their business is suffering, which results in less money available for spousal- and child-support payments. There are many ways that income can be diverted or hidden by business owners, including, but not limited to:

Revenues can be held until the next fiscal year and not recorded in the year in which the services were performed or the sale was made, thus reducing revenues and income.

Sometimes revenues are just not collected, which is evidenced by a rise in accounts receivable. This reduces cash basis revenues and income.

There also may be several large equipment- and capital-expenditure purchases made unnecessarily, which increases expenses and reduces income.

The business owner may decide to run his or her personal expenses through the business, which would be evidenced by an increase in expenses and a reduction in income.

Another common area that is manipulated is cash. In a cash-intensive business like a restaurant and bar, skimming cash can go undetected. This could be evidenced by a decrease in revenues and a gross profit margin that is not in line with industry standards.

There can be diverted payments to third parties disguised as legitimate business expenses. This results in an increase in expenses and a reduction in income.

The business owner may have customers pay in cash or pay another related entity.

Not recording assets on the financial records and/or federal income tax returns.

Rapid pay down or payoff of substantial mortgages, personal loans, commercial loans or other liabilities before maturity dates, resulting in an increase in expenses and reduction in income.

Temporarily shutting down the business which gives the appearance the business was failing and without income.

Even non-owner employees going through divorces are susceptible to R.A.I.D.S, although it is not as common. One way that income can be diverted is by not working overtime when overtime was available and taken in prior years.

There are ways that R.A.I.D.S. can be detected. Has the spouse’s lifestyle spending changed at all? Does the spouse seem genuinely concerned about his or her own future earnings capacity? Has the spouse expressed concern about the business to any friends or relatives? Collectively these can help to paint a financial picture of the situation.

Forensic accounting specialists and business valuators frequently help attorneys determine if the decrease in income is legitimate or if the income is contrived. A business valuator who also has the skills of a forensic accountant can help with normalizing the earnings of the business when conducting the business valuation. If you suspect your client may be a victim of R.A.I.D.S and you wish to find a cure, seek a seasoned forensic accounting/business valuation specialist.•

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Howard I. Gross, CPA/ABV/CFF, CFP; Steven W. Reed, CPA/ABV; Erika M. Gowan, CPA/CFF, CFE; and Casey L. Higgs, CPA/CFF, CFE, CVA are with BGBC Partners, LLP – Litigation, Forensic and Business Valuation. Contact BGBC at 317-633-4700 or visit www.bgbc.com. The opinions expressed are those of the authors.

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  1. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  2. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  3. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

  4. When I hear 'Juvenile Lawyer' I think of an attorney helping a high school aged kid through the court system for a poor decision; like smashing mailboxes. Thank you for opening up my eyes to the bigger picture of the need for juvenile attorneys. It made me sad, but also fascinated, when it was explained, in the sixth paragraph, that parents making poor decisions (such as drug abuse) can cause situations where children need legal representation and aid from a lawyer.

  5. Some in the Hoosier legal elite consider this prayer recommended by the AG seditious, not to mention the Saint who pledged loyalty to God over King and went to the axe for so doing: "Thomas More, counselor of law and statesman of integrity, merry martyr and most human of saints: Pray that, for the glory of God and in the pursuit of His justice, I may be trustworthy with confidences, keen in study, accurate in analysis, correct in conclusion, able in argument, loyal to clients, honest with all, courteous to adversaries, ever attentive to conscience. Sit with me at my desk and listen with me to my clients' tales. Read with me in my library and stand always beside me so that today I shall not, to win a point, lose my soul. Pray that my family may find in me what yours found in you: friendship and courage, cheerfulness and charity, diligence in duties, counsel in adversity, patience in pain—their good servant, and God's first. Amen."

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