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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. So that none are misinformed by my posting wihtout a non de plume here, please allow me to state that I am NOT an Indiana licensed attorney, although I am an Indiana resident approved to practice law and represent clients in Indiana's fed court of Nth Dist and before the 7th circuit. I remain licensed in KS, since 1996, no discipline. This must be clarified since the IN court records will reveal that I did sit for and pass the Indiana bar last February. Yet be not confused by the fact that I was so allowed to be tested .... I am not, to be clear in the service of my duty to be absolutely candid about this, I AM NOT a member of the Indiana bar, and might never be so licensed given my unrepented from errors of thought documented in this opinion, at fn2, which likely supports Mr Smith's initial post in this thread: http://caselaw.findlaw.com/us-7th-circuit/1592921.html

  2. When I served the State of Kansas as Deputy AG over Consumer Protection & Antitrust for four years, supervising 20 special agents and assistant attorneys general (back before the IBLE denied me the right to practice law in Indiana for not having the right stuff and pretty much crushed my legal career) we had a saying around the office: Resist the lure of the ring!!! It was a take off on Tolkiem, the idea that absolute power (I signed investigative subpoenas as a judge would in many other contexts, no need to show probable cause)could corrupt absolutely. We feared that we would overreach constitutional limits if not reminded, over and over, to be mindful to not do so. Our approach in so challenging one another was Madisonian, as the following quotes from the Father of our Constitution reveal: The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse. We are right to take alarm at the first experiment upon our liberties. I believe there are more instances of the abridgement of freedom of the people by gradual and silent encroachments by those in power than by violent and sudden usurpations. Liberty may be endangered by the abuse of liberty, but also by the abuse of power. All men having power ought to be mistrusted. -- James Madison, Federalist Papers and other sources: http://www.constitution.org/jm/jm_quotes.htm RESIST THE LURE OF THE RING ALL YE WITH POLITICAL OR JUDICIAL POWER!

  3. My dear Mr Smith, I respect your opinions and much enjoy your posts here. We do differ on our view of the benefits and viability of the American Experiment in Ordered Liberty. While I do agree that it could be better, and that your points in criticism are well taken, Utopia does indeed mean nowhere. I think Madison, Jefferson, Adams and company got it about as good as it gets in a fallen post-Enlightenment social order. That said, a constitution only protects the citizens if it is followed. We currently have a bevy of public officials and judicial agents who believe that their subjectivism, their personal ideology, their elitist fears and concerns and cause celebs trump the constitutions of our forefathers. This is most troubling. More to follow in the next post on that subject.

  4. Yep I am not Bryan Brown. Bryan you appear to be a bigger believer in the Constitution than I am. Were I still a big believer then I might be using my real name like you. Personally, I am no longer a fan of secularism. I favor the confessional state. In religious mattes, it seems to me that social diversity is chaos and conflict, while uniformity is order and peace.... secularism has been imposed by America on other nations now by force and that has not exactly worked out very well.... I think the American historical experiment with disestablishmentarianism is withering on the vine before our eyes..... Since I do not know if that is OK for an officially licensed lawyer to say, I keep the nom de plume.

  5. I am compelled to announce that I am not posting under any Smith monikers here. That said, the post below does have a certain ring to it that sounds familiar to me: http://www.catholicnewworld.com/cnwonline/2014/0907/cardinal.aspx

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