How Mistakes on Your Financial Declaration Can Make You Look Like a Crooked Liar
Written by: Megan Dell
[Thanks to Richard T. Livingston, CPA/CFF, CFE, CVA and Partner at FORVIS for helping write this article!]
Based on Rule 20, SCRFC, almost all cases in South Carolina Family Court require each party to complete a “financial declaration.”
The financial declaration form is complicated, and it can be easy to make mistakes when filling it out. Here’s how to avoid some of the most common mistakes that can make you look like a liar.
Underreporting Your Salary on the Financial Declaration
If you work for someone else and receive a W-2 each year, you might be inclined to use the amount in box 1 on your W-2, which is “wages, tips, compensation,” to determine your gross monthly income. On the financial declaration, this line is referred to as “Principal Earnings from Employment.”
However, the amount in box 1 on your W-2 reflects some pre-tax deductions that have already been taken from your gross income. To more accurately report your “Principal Earnings from Employment” on the South Carolina Family Court financial declaration, you should use box 5 from the W-2 (labeled “Medicare wages and tips”) because fewer deductions are reflected in the income you pay Medicare taxes on.
An alternate way to calculate Principal Earnings from Employment is to use a recent pay stub. As long as your pay does not change between pay periods, then the amounts on your pay stubs can be extrapolated to determine your monthly earnings and deductions on the financial declaration.
However, if you use this method, you must pay attention to how frequently you are paid. If you are paid every 2 weeks (“biweekly”), then you receive a total of 26 paychecks per year. Therefore, you cannot simply multiply your gross pay by two to determine your monthly gross income. Instead, you must multiply one two-week pay period by 26 and then divide by 12 to determine your monthly gross earnings. Similarly, if you are paid weekly, you must take your weekly gross pay, multiply it by 52 weeks, and then divide by 12 to calculate your monthly gross earnings.
Minimizing Your Variable or Hourly Income
It is common to have a variable work schedule and receive payment as an hourly employee. One method family court litigants sometimes use is to take several years’ worth of gross income and report the average monthly gross income.
If you have not received a raise or started working more hours in recent years, then using an average may be appropriate. But if your earnings have steadily increased, either because you’ve been working more or at a higher rate, then it is dishonest to ignore that when reporting your income on your financial declaration.
Depending on whether you receive bonuses or earn more seasonally, a more accurate method might be to use a recent pay stub and annualize your gross wages to project what you will earn for the entire calendar year.
Ignoring Self-Employment Perks and Business Profits
Small business owners often pay personal expenses, such as car payments or cell phone bills, from their business accounts. Then they deduct those expenses from their income when preparing their tax returns, which might be proper (depending on the circumstances).
Because the expenses are personal, the cost should be included as gross income to the business owner when completing a financial declaration. Even worse is when the business owner does not report those expenses as income received and then lists them on page 2 of the financial declaration as if they were personal expenses – this is obvious “double-dipping” and blatantly dishonest.
26 U.S. Code Section 61 includes business profits in its definition of “gross income.” Page 1 of the financial declaration has a line item for “Rental Income and Business Profits.” If you operate a small business, even if you are just a landlord for a rental property, then you should be especially careful with the information you provide here.
Some business owners are able to claim a depreciation expense – from, for example, the purchase of a piece of equipment – on their tax returns. But if you include the depreciation from reporting of your gross income in Family Court, you will look like you earn less than you actually do.
Overreporting or Double Counting Expenses
Page 2 of the financial declaration is intended to give the Family Court judge a snapshot of what your expenses are each month. Here are five ways you can mistakenly mislead the Court about your expenses:
- The line for “Note or Mortgage Payment on Residence(s)” anticipates you will provide your monthly mortgage payment. However, it is common for property taxes and homeowners’ insurance premiums to be escrowed as part of the mortgage payment. If those expenses are paid as part of your mortgage payment, then you should not list them separately for the line items “Real Property Tax on Residence(s)” and “Maintenance for Household.”
- For “Auto Payment,” do not list a payment you think you will have to pay in the future – when you buy a new car – if you do not currently have a car payment. Similarly, for “Medical and Dental Expenses (not paid by insurance),” it is better to report what you have actually spent each month than to estimate what you think you might spend in the future.
- When determining how much you spend on “Maintenance for Household” each month, do not include large one-time, infrequent expenses, such as renovations or furniture purchases, as if they happen every month.
- The line item for “All Installment payments” on the financial declaration is intended to include all debts you pay on a monthly basis, including credit cards. If you charge all of your regular expenses to your credit cards and then pay the cards off each month, then you need to make that clear when completing the financial declaration. Otherwise, your expenses will appear to be double what they actually are.
- The lines for “Entertainment” and “Adult Incidental Expenses” provide opportunities to inflate expenses, but South Carolina Family Court judges are not stupid, and they will recognize if your expenses in this category are inconsistent with your earnings and debt balances.
Failing to Follow the Instructions
Page 3 of the financial declaration is where you start listing your assets and debts. Divorce litigants often fail to carefully think through all of the things they own, including bank accounts, deferred compensation, and stock options. They also can forget to list all the debts they owe, such as a boat loan incurred with friends. These mistakes result in a financial declaration that is inaccurate and can appear evasive.
Toward the bottom of page 3 of the financial declaration, there is an instruction: “If total assets are less than $300,000.00, sign and have notarized. If total assets are greater than $300,000.00, itemize assets by completing additional sections below and sign and have notarized.” If you have total assets in excess of $300,000.00 and do not itemize them on pages 3 and 4 of the financial declaration, you could be sanctioned under Rule 20(d), SCRFC.
Avoid Looking Like A Liar: Hire Experienced Help
To avoid making mistakes on your financial declaration, it is important to get guidance from an experienced South Carolina divorce lawyer and, depending on your circumstances, possibly also a forensic accountant.