The Importance of Disclosure and Financial Consistency
in Divorce and Tax by Charlie Burak, CPA
For most of their lives, individuals guide their financial decisions with two primary goals: Goal number one: to make as much money as possible. Once an individual has had a taste of success with this first goal, then goal number two becomes very clear: to pay as little of this income as possible toward taxes. Successful individuals spend years creating structures to allow for maximum benefit with minimum tax. Suddenly, however, for many of these successful individuals, a new goal comes immediately to the forefront. How are they going to retain as much value as possible through a marital dissolution? Many divorcing parties are simply looking for a fair and equitable resolution of their property division. There is nothing inherently wrong with the goal of retaining value through the divorce process. The goal itself is not unreasonable for a person confronting the most expensive individual event of their lives. The problem arises when the singular goal of maximizing their side of the divorce ledger may conflict with the other priorities of income and taxes. On my first day of preparing tax returns in a CPA firm, my boss posed to me the following question: would I like to pay more or less in taxes? The correct answer is that we 10
MARCH 2021
should want to pay more in taxes, because it is a primary indicator that we made more money that year. It’s not a lesson against tax planning, but rather a reminder that one should always keep priorities in line. Less tax should not be the primary metric by which one evaluates the financial year The same concept can apply even more drastically during a marital dissolution. It can take years for individuals to effectively optimize the income/tax equation. Often, divorcing parties have had little to no time to plan for divorce. The sudden prospect of loss can become so overwhelming that an otherwise prudent decision maker may operate from a position of uncharacteristic panic. This can lead to poor and short-sighted decisions which can create unplanned negative consequences, hindering all financial priorities. One of our first professional responsibilities as litigation consultants and experts is to inform clients of the rules of family law. Family law is often not intuitive, and parties are shocked to learn the legal consequences which they have unwittingly created by prior actions. Prior efforts to maximize profits and minimize taxes may suddenly become useful tools against them. One of only three key elements of the fraud triangle is rationalization and it is a normal psychological response for an individual hearing this news to
