Where To Look For True Cash Income

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In small business valuations and income analyses in matrimonial litigation, one of the hardest components to determine is “cash”… Is there unreported cash income and, if so, how much?

The typical scenario of minimal income reported on a business owner’s tax return versus their much greater lifestyle expenses is usually the first red flag. How can someone live on a minimal amount of reported income per year? In most cases, the first response is that there is unreported cash income. However, as the economic times are changing, so are the consumer’s sources of funds. The trend is moving quickly to less and less “cash”.

If this issue arises, a business valuation cannot be completed without a review of the business owner’s spending and personal banking documents. It is common for small business owners, such as sole proprietors and single member LLCs, to intertwine their personal and business spending.

Credit & Debit Cards

California Composite ReturnMost industries have been trending towards electronic forms of payment. There are fewer “cash” businesses today. Businesses now accept credit and debit card payments for small transaction amounts, where consumers historically paid with cash. These include gas stations, coffee shops, fast food restaurants, etc.

In recent years, credit card use has continually increased. Even more, the use of debit cards has drastically increased. This form of payment is replacing cash and check payments. For example, it is much more common to enter a coffee shop and see someone pay a $5.00 bill with a debit card versus writing out a check or even paying with cash from their wallet.

Plus, credit and debit card companies offer more and more incentives to consumers to use their cards (i.e. reward points, miles and cash back options). Why use cash if you can “get paid” to use a credit card?

Consumers also use bank transfers more frequently or other electronic payment sources, such as Paypal. Society is moving quickly towards a paperless economy. All of these forms of payment are easily tracked and reported. Businesses have less and less access to “cash” from sales.


People will carry some “spending money” in their wallets; however, today the more likely source of this cash is from the ATM machine at the bank, not from unreported business income. You have to be careful if one party explains that “he always has a lot of cash on him” or “she pays for everything with cash”. If you look at the bank statements and see thousands of dollars of ATM withdrawals each year, this “cash” is just coming from their earned income and may not be undisclosed income from the business.


Going back to the income vs. lifestyle concept – another factor that has to be considered is the availability of debt, such as mortgages, refinancing and lines of credit. It is seen too frequently where a married couple seems to be living an extravagant lifestyle, such as vacations, home additions & remodeling, luxury cars, etc., but there doesn’t seem to be the income to fund all of these expenses. People are mortgaging their homes to the fullest extent, leasing their vehicles and maxing out credit card balances. They typically continue on this path until all of their credit and loan options are maxed out. Then, their lifestyle and financial situation drastically changes.

Other Sources of Funding

Other sources of spending for a family could be an inheritance received, gifts or loans from parents/friends or depletion of accumulated savings. These sources would be in addition to any income earned by the parties, but would not be reported on their tax returns. To complicate the situations further, there could be outside parties paying expenses directly on behalf of the parties. All of these actions could give the appearance of an expensive lifestyle that is not able to be funded from the business earnings.

You should always ask how the parties’ expenses are being funded. Check the deposits in the bank accounts – do they equal what the reported earnings are? If there are more funds deposited than reported, you need to identify the source of the additional deposits, which could be unreported cash or could be from loan accounts, credit card advances, loans or gifts from family/friends, etc. If deposits are less than reported income, you should ask if there is another bank account or are there checks (i.e. salary checks) that are being cashed instead of deposited?

In Matrimonial Litigation, you really cannot evaluate issues separately. Determining what a business is worth and what the level of income generated is, how a family’s expenses are funded and what the marital assets & liabilities are, is all interrelated and needs to be analyzed together to make sure you have an understanding of how funds are generated and used to support the marital estate.

Carleen J. Gaskin, CPA, CFF, Partner Carleen Gaskin, CPA, CFF, Partner
T (201) 265 2800
[email protected]


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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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