how to prove husband's cash-based income

            Posted on December 25, 2016 

How to prove husband’s cash-based income

Q.   I’m getting divorced from my contractor husband. We’ve had a very nice life style. But now I can’t prove how much money we lived on or where the money came from.
My husband formed a separate C-type corporation and then built some apartment buildings. He now rents about 100 apartments. He formed a LLC, which he manages.

The LLC is the exclusive manager of the buildings. He has employees who get repairs, plowing, etc. done and they also make note of and then deposit checks from tenants who pay rent. And he personally collects rents from several tenants who pay cash because most of their earnings is from cash, such as tips.

My divorce lawyer doesn’t know how to prove how much my husband really makes.

Can you give him some hints?

A.   First, you must get a list for the last three to five years of tenants for each building, plus copies of all written leases. Any claim that apartments don’t have leases are likely those who are paying cash or tenants who give their checks to your husband. He then cashes those checks and puts all the cash in his pocket.

Also get a copy of the “rent roll”. That should list each apartment number down the left side of the page and the name of each tenant, usually on an Excel spread sheet. The months of the years are listed across the top of the page. As each rent is paid, either a check mark or the amount of payment is typed in the proper box on the spread sheet.

Compare the listed apartments to the actual numbers on each apartment. That’s the only way you can be sure the information is complete. Unlisted apartments may indicate the cash-paying tenants.

Count the parking spaces. If each apartment gets one space, they would have to pay for a second space. Or extra spaces may be rented to renters from nearby homes or apartments. Unassigned spaces are often occupied by cash-paying tenants.

As to management, such folks typically get paid 10 percent of total income. It can go to 15 percent if unusual management work is needed. The balance of the money, less expenses paid by the LLC, should be reported to the IRS as corporate income and taxed at about 35 percent.

But I’d bet your husband claims management fees of 40 to 50 percent, which reduces net corporate income to almost nothing. Those management LLC fees will then be reported on Schedule E. But that income isn’t subject to Social Security or Medicare taxes.

If any part of these assumptions are correct, don’t sign a joint income tax return because now that you know what’s going on, you’re no longer an innocent spouse. Your husband has “chutzpah”, meaning he’s a brazen jerk. I sense his luck is about to run out.