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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. Mr. Levin says that the BMV engaged in misconduct--that the BMV (or, rather, someone in the BMV) knew Indiana motorists were being overcharged fees but did nothing to correct the situation. Such misconduct, whether engaged in by one individual or by a group, is called theft (defined as knowingly or intentionally exerting unauthorized control over the property of another person with the intent to deprive the other person of the property's value or use). Theft is a crime in Indiana (as it still is in most of the civilized world). One wonders, then, why there have been no criminal prosecutions of BMV officials for this theft? Government misconduct doesn't occur in a vacuum. An individual who works for or oversees a government agency is responsible for the misconduct. In this instance, somebody (or somebodies) with the BMV, at some time, knew Indiana motorists were being overcharged. What's more, this person (or these people), even after having the error of their ways pointed out to them, did nothing to fix the problem. Instead, the overcharges continued. Thus, the taxpayers of Indiana are also on the hook for the millions of dollars in attorneys fees (for both sides; the BMV didn't see fit to avail itself of the services of a lawyer employed by the state government) that had to be spent in order to finally convince the BMV that stealing money from Indiana motorists was a bad thing. Given that the BMV official(s) responsible for this crime continued their misconduct, covered it up, and never did anything until the agency reached an agreeable settlement, it seems the statute of limitations for prosecuting these folks has not yet run. I hope our Attorney General is paying attention to this fiasco and is seriously considering prosecution. Indiana, the state that works . . . for thieves.

  2. I'm glad that attorney Carl Hayes, who represented the BMV in this case, is able to say that his client "is pleased to have resolved the issue". Everyone makes mistakes, even bureaucratic behemoths like Indiana's BMV. So to some extent we need to be forgiving of such mistakes. But when those mistakes are going to cost Indiana taxpayers millions of dollars to rectify (because neither plaintiff's counsel nor Mr. Hayes gave freely of their services, and the BMV, being a state-funded agency, relies on taxpayer dollars to pay these attorneys their fees), the agency doesn't have a right to feel "pleased to have resolved the issue". One is left wondering why the BMV feels so pleased with this resolution? The magnitude of the agency's overcharges might suggest to some that, perhaps, these errors were more than mere oversight. Could this be why the agency is so "pleased" with this resolution? Will Indiana motorists ever be assured that the culture of incompetence (if not worse) that the BMV seems to have fostered is no longer the status quo? Or will even more "overcharges" and lawsuits result? It's fairly obvious who is really "pleased to have resolved the issue", and it's not Indiana's taxpayers who are on the hook for the legal fees generated in these cases.

  3. From the article's fourth paragraph: "Her work underscores the blurry lines in Russia between the government and businesses . . ." Obviously, the author of this piece doesn't pay much attention to the "blurry lines" between government and businesses that exist in the United States. And I'm not talking only about Trump's alleged conflicts of interest. When lobbyists for major industries (pharmaceutical, petroleum, insurance, etc) have greater access to this country's elected representatives than do everyday individuals (i.e., voters), then I would say that the lines between government and business in the United States are just as blurry, if not more so, than in Russia.

  4. For some strange reason this story, like many on this ezine that question the powerful, seems to have been released in two formats. Prior format here: http://www.theindianalawyer.com/nominees-selected-for-us-attorney-in-indiana/PARAMS/article/44263 That observed, I must note that it is quite refreshing that denizens of the great unwashed (like me) can be allowed to openly question powerful elitists at ICE MILLER who are on the public dole like Selby. Kudos to those at this ezine who understand that they cannot be mere lapdogs to the powerful and corrupt, lest freedom bleed out. If you wonder why the Senator resisted Selby, consider reading the comments here for a theory: http://www.theindianalawyer.com/nominees-selected-for-us-attorney-in-indiana/PARAMS/article/44263

  5. Why is it a crisis that people want to protect their rights themselves? The courts have a huge bias against people appearing on their own behalf and these judges and lawyers will face their maker one day and answer for their actions.

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