Starting Over

CPAs can use well-honed skills to help divorcing individuals begin a new chapter on sound financial terms.
BY THOMAS F. BURRAGE

EXECUTIVE SUMMARY
CPAs’ SPECIALIZED SKILLS put them in a unique position to help divorcing individuals and their attorneys organize financial issues related to property settlements and support awards. Some practitioners are developing a domestic-relations-consulting niche.

CPAs ANALYZE FINANCIAL DATA according to a range of statutes, regulations, rulings and case law. Local matrimonial statutes and case law are in general less complicated than many regulations practitioners interpret daily.

IN DIVORCE WORK, CPAs DELVE into a couple’s financial records to determine the worth of their domestic and business assets, jointly and individually; whether assets are encumbered; who earns how much; who spends what; and what tax liabilities are incurred under one asset distribution scenario vs. another.

CPA/ABVs VALUE DIVORCING COUPLES’ business interests, and such expertise can be used to assess other financial assets such as notes, mortgages and retirement plans. Divorce case law and local statutes may require specific methods. CPAs can help structure the payout to provide the greatest tax advantage.

SOMETIMES DIVORCING PARTIES, through error or deception, do not accurately disclose assets in the discovery process. CPAs can use forensic skills to find them.

A CPA CONSULTING IN A DIVORCE CASE will address tax issues such as the taxability of support, the basis of property to be divided, the impact of the allocation of the dependency exemptions and the timing of the divorce or separation. Knowledge of the divorce provisions in the Internal Revenue Code and how to apply them can help clients find liquidity.

THOMAS F. BURRAGE, CPA, is the litigation and valuation services partner in charge at Meyners & Co. LLC in Albuquerque, New Mexico. His recent book, coauthored with Sandra Morgan Little and published by John Wiley, is Divorce and Domestic Relations Litigation. He is a member of the AICPA family law task force and the litigation and dispute resolution subcommittee. His e-mail address is tburrage@meyners.com .

hen marriages hit the skids—and in the United States almost 50% of them do—divorcing individuals must position themselves for a radically different future than they envisioned when they vowed to “love and honor.” Under tremendous stress, often while angry and grieving for the past, they will make financial decisions affecting the rest of their and their children’s lives. Because such emotions tend to crowd out rational self-interest, these folks can benefit from a steadying hand, which CPAs’ specialized tax, audit, valuation and forensic skills put them in a unique position to provide. Advising this growing segment of the population and their attorneys about the money issues of ending a marriage is the basis of domestic relations consulting. Here’s how what practitioners know can help people undergoing a divorce to organize the information courts use in determining support awards and dividing a marital estate.

QUALIFICATIONS WITH A CAVEAT
In simple terms, dividing a divorcing couple’s property involves identifying, valuing and apportioning assets, and CPA tax and audit expertise is a natural foundation for discovering the most relevant information to complete that process. Practitioners routinely determine owners’ equity and cash flow, income and the value of any noncash benefits, according to a range of statutes, regulations, rulings and case law. CPAs can’t practice law, but they do apply it when analyzing financial data. Local matrimonial statutes and case law are, in general, less difficult to understand than many regulations practitioners interpret daily.

In divorce work, CPAs compile data to determine
What a couple’s personal assets are worth, both jointly and individually.
What their business holdings are worth, both jointly and individually.
Whether assets are encumbered (by debt or legal restrictions, for instance).
Who earns how much.
Who spends what.
What tax liabilities are incurred under one asset distribution scenario vs. another.

“Those financial research and interpretive skills are exactly what divorce attorneys and their clients need,” says William B. Stewart Jr., CPA/CVA, CFE, of Houston. “Our work in domestic relations is a microcosm of everything we do as CPAs,” he says.

There’s an important caveat, however: Often advice that’s good for one party is detrimental to the other. CPAs will want to avoid engagements having a conflict of interest. In some cases a divorcing couple that has been a client will want the CPA to advise them both and work with each spouse’s individual counsel. If the practitioner accepts, he or she should describe potential areas of conflict in the engagement letter and require both parties and their lawyers to sign a release specifically waiving them (see exhibit ). Without a release a practitioner should use great caution when advising anyone whose spouse has been a client of the firm. Note : Many CPAs who specialize in this niche cultivate relationships with neutral domestic relations attorneys to obtain referrals from them.

If at First You Don’t Succeed…

About 80% of divorced men and 75% of divorced women remarry, whether or not they have children. Most do so within three years.

Source: www.divorcewizards.com .

RECORDS, RESOURCES AND NEEDS
It isn’t unusual for a divorcing couple’s financial records to be in disarray and spread between two households, with important papers stuffed in a shoe box, for instance. That shoe box often contains brokerage and bank statements, deeds, titles, invoices and tax returns along with other important records. In divorce consulting, a CPA organizes and analyzes those financial documents, outlines the couple’s holdings and income, relates findings and explains the tax and other issues to the hiring attorney, the parties and the judge.

Based on that information, the court then divides the assets and decides the amount and duration of support, if any. To award child or spousal support, the court looks at each individual’s income, cash flow, noncash benefits, perquisites and established level of expenditures and projects the need of the recipient, the ability of the payer to fund it and the tax consequences to both. (For example, spousal support might be taxable where child support is not.) Michelle Gallagher, CPA/ABV, of Gallagher and Associates PLC of Lansing, Michigan, says courts don’t always agree with a spouse about what’s considered a “necessary” expense. For example: “One lady with a wealthy husband listed a $3,500 monthly expenditure for shoes as necessary. She didn’t get it,” Gallagher says.

CPAs assisting clients analyze divorcing individuals’ historical spending patterns and use the information to project postseparation and postdivorce expenses. They consult their client’s attorney(s) and refer to local case law to determine what types of income and expenses a court considers relevant when it establishes pending-divorce and postdivorce support awards, the amounts of which may differ.

RESEARCH TRUMPS MISTRUST
The nature of divorce is conflict, and the list of issues the parties dispute can be extensive. One partner may accuse a spouse of hiding income or say underperforming marital assets should be sold and reinvested to produce a higher rate of return.

Always and Never Tips for Divorce Consulting

CPAs’ accounting skills and objectivity qualify them to assist divorcing parties, and the escalating divorce rate in our society is creating a demand for these advisory services. Practitioners who use this opportunity to expand their scope and increase revenue should observe the following dos and don’ts:

Always get an engagement letter or other evidence of the client’s understanding of what services are to be performed, what the financial responsibilities may be and for whom the CPA is working.

Always consider whether there are real or perceived conflicts of interest in representing a party to a divorce. This is particularly critical when the CPA has previously represented the couple in other matters.

Always approach the engagement with the objective of helping the couple preserve assets, maximize cash flow and solve financial issues to their joint advantage.

Always consider the parties’ respective financial interests, but understand the client may make decisions on an emotional basis.

Never fail to get a retainer to cover your fee. Even when the CPA has performed in a stellar manner, the client—who is on an emotional roller coaster—may feel differently when the process ends.

Never get emotionally attached to your clients or their issues. When this happens the CPA loses credibility and objectivity with the parties and the court.

Never accept cases for which others may be more qualified without informing your client and his or her attorney of that fact.

When particular circumstances require CPAs to check such claims’ accuracy, they can use business valuation methods to do the job. Practitioners may compare performance for investments or individuals with appropriate benchmarks or peer productivity figures or assess whether a business or asset is under- or overperforming by looking for consistent, reasonable data about that type of entity. To learn whether assets have been invested appropriately, CPAs can compare them with other suitable investments. CPA/ABVs often obtain comparative business valuation data from the Internet and other information sources (see “ Signed, Sealed, Delivered, JofA , Nov.02, page 30).

Although divorcing couples usually disagree about how to divide their property, local statutes and case law largely determine value and proportionate ownership. If the ownership interest in property is disputed because it has been acquired, partially or completely, with separate funds, CPAs can trace the sources of funds through the financial records of both individuals. Janet M. McHard, CPA/ CVA, of Meyners & Co. LLC in Albuquerque, New Mexico, gives an example: “I recently traced funds through 60 bank accounts spanning 14 years to prove that more than $1 million in property and securities were directly traceable from gifts and inheritances my client had received. When we started, the opposition claimed all of it was community property. When we finished they conceded it was separate.”

Client expectations are difficult to manage in tracing engagements, however. It’s virtually impossible for a CPA to predict how much work will be required or what the results ultimately will be. CPAs performing tracings should communicate with clients and attorneys regularly to let them know what results they’re getting and the fee-to-date amount.

Divorcing couples’ business interests need to be valued before they can be fairly divided, and CPA/ ABVs have the acumen to assess these stakes. Methods detailed in local divorce case law may differ from some valuation norms, so check regional legal requirements carefully. Gary R. Trugman, CPA/ABV, of Trugman Valuation Associates in Rockaway, New Jersey, says: “Many times the family business is the largest asset in the marital estate and a major portion of equitable distribution. We use our skills and knowledge as CPAs to help structure the payout in a fashion that provides the greatest tax advantage to the parties.”

 
Engagement Letter Waivers
A CPA who chooses to work for a client couple should discuss the potential conflict in an engagement letter addressed to the clients’ attorneys. Both clients and their respective attorneys should sign it. It might express waivers such as the following examples.

This letter will confirm our discussions and the engagement of our firm on behalf of Dr. Herbert Doe and Jane Parker Doe, hereafter collectively referred to as the “client,” to consult with both parties on a “neutral” basis related to their divorce. All workpapers or other documents used by us during the course of this engagement will be maintained in segregated files. At the completion of our engagement, the originals and all copies thereof will be returned to you, upon your written request.

By signing this letter agreement, you and your clients acknowledge and request that all parties are aware that ABC Accounting Firm has provided exclusive accounting services over the past several years to the parties individually, to Dr. Doe Dentistry, to the Doe Family Limited Partnership, to offspring Bob and Mary Doe and to the children’s trusts established for their benefit. You and the parties represent to us that the parties have been fully informed as to any potential conflicts of interest and that the parties nonetheless wish to engage us to perform these consulting services related to financial and accounting issues in their divorce, including issues concerning the value of the dental practice. The parties hereby release ABC Accounting Firm and its members, employees, successors or insurers from any claim or liability for damages resulting from any perceived or actual conflict of interest.

Expertise such as what practitioners use to value businesses also can be employed to value financial assets such as notes, mortgages and retirement plans, which may be affected by conditions such as a holding period, rate of return, interest rates and the amount and timing of income generated. Part of valuing those financial instruments includes researching the appropriate levels of premium or discount allowable under the local law.

In some circumstances the value of a property may have been enhanced by the labor of the couple. If this has happened with property that isn’t jointly owned (perhaps the wife contributed marketing services to the husband’s family business or the husband reroofed a home the wife inherited), there may be conflict about who deserves the value created from the spouse’s labor. Reimbursement for the work can settle this as can other types of apportionment of the value.

When valuing assets it benefits the CPA greatly to consult with the client’s attorney to ensure a thorough understanding of local law. Valuations vary with circumstances, and jurisdictional requirements may cause a valuation for divorce purposes to differ significantly from one that’s appropriate for another type of engagement. The differences can affect how the CPA advises the client.

Divorcing parties also frequently have disputes about the costs associated with selling assets. These include income tax on the sale of the asset and/or commissions and fees. Some jurisdictions allow the deduction of one or both such costs to be divided. If the cost is an unavoidable part of the property division, the parties typically share it in proportion to their respective ownership. If not, the expense is borne by the partner who gets the property.

Even when a couple prefers not to sell an asset, CPAs nevertheless calculate the deferred income tax liability for the asset as if it were going to be sold. The tax responsibility will devolve to the person awarded the asset and, in some cases under local law, won’t influence the property division. However, because the tax associated with the asset may become due at a future date, the looming liability may impel clients to choose one asset over another.

 
How CPAs Can Help

To expedite closure in divorce consulting, practitioners can

Identify all the assets and liabilities of the couple’s estates.

Consider the tax consequences of the asset divisions.

Evaluate all the various entities of the parties—not just the businesses.

Act as employee benefits advisers by informing clients about alternative ways to deal with retirement plans.

Perform financial planning by advising clients which assets to take and in which form they will be most advantageous.

Source: William B. Stewart Jr., CPA/CVA, Houston.

UNCOVER FINANCIAL DECEPTION
The emotional turmoil that affects divorcing individuals often causes them to lose trust. It’s easy to understand. Many times divorces are precipitated by one party’s belief that the other has kept information from him or her, and allegations of financial deception are common. Sometimes misrepresentations occur, whether by intentional or unintentional conduct.

CPAs regularly analyze clients’ organizational and financial information to determine the possibility or existence of corporate financial fraud, and the skills for uncovering whether matrimonial income or assets are being hidden are the same. Lori E. Bunker-Leary, CPA/CVA, of Financial Investigative Services in Montclair, Virginia, offers an anecdote: “I represented the wife of a CEO of a major corporation and part of my engagement was to determine the value of his retirement vehicles and estimate her interest in those accounts. He wasn’t uncooperative, but he didn’t have a lot of time to answer my questions. He requested I speak with corporate counsel to get answers.

“I felt I wasn’t getting the whole story, so I called the pension department and spoke with a clerk there who divulged the existence of an annuity from a closed retirement plan. The annuity, worth over $650,000, had not been disclosed in discovery. When questioned, the husband said he was quite surprised to learn of its existence, as was his attorney. My client was thrilled she would be getting a percentage. I learned from this case that you can’t always depend on the records produced—and CPAs’ forensic skills come into play in all forms of investigations,” says Bunker-Leary.

CPAs are trained to pay attention to detail and to be persistent about resolving inconsistencies, and the ability to serve clients’ interests well depends on these qualities. Educated clients understand, however, that the CPA’s best efforts and techniques can’t guarantee they will discover every dollar of income or every well-hidden asset that may be buried in the backyard. When given a choice, practitioners must strike a cost-benefit balance between dedication and knowing when to call a halt so clients aren’t saddled with outlandish bills. Communicating an expectation of realistic results is essential to a domestic relations practitioner’s long-term success.

TAX TREATMENTS CAN UNLOCK LIQUIDITY
A CPA consulting in a divorce case will address tax issues such as the taxability of support, the basis of property to be divided, the impact of the allocation of the dependency exemptions and the timing of the divorce or separation. However, after the valuation and disposable income reports are on record and the divorcing parties and their counsel turn their thoughts to settlement and, one hopes, away from litigation, liquidity becomes an issue. A careful financial solution addresses concerns about alimony recapture, contingencies affecting the classification of payments as alimony or child support, meeting requirements to qualify payments as deductible alimony and how best to use tax rules in settling the case. CPAs who practice in this discipline have solid knowledge of the divorce provisions in the Internal Revenue Code and how to apply them to help create liquidity.

Donald J. DeGrazia, CPA/ ABV of Gold Meltzer Plasky & Wise in Moorestown, New Jersey, says: “Often we are able to generate liquidity or sources of collateral that aren’t apparent to the spouses and their attorneys. For example, in several cases I worked on there was liquidity inside the company but little in the marital estate, yet a dividend or bonus would have created either double taxation or a 45% tax rate.” His firm recommended a stock redemption to halve the tax rate and free up the liquidity inside the C corporation.

In another case a wife’s concern that the husband would default on an equitable distribution note made a collateral interest in his closely held company unacceptable. In that instance the firm recommended use of a qualified domestic relations order (QDRO) of the husband’s interest in his retirement plan as collateral, which also collateralized his alimony obligation. “A 1992 IRS private letter ruling provided the road map to implementing this strategy,” DeGrazia says.

In yet another case his firm demonstrated to participants how the three-year alimony recapture period could be shortened to 367 days, allowing more money to be classified as alimony in a much shorter period and taking advantage of the wife’s lower tax bracket, all in compliance with tax law. “Finally, by using the revenue ruling 2002-22 guidelines, we’ve been able to help counsel successfully lower the tax bracket on deferred compensation and nonqualified stock options (those still above water) by shifting them from the employee spouse to the nonemployee spouse for exercise in a lower tax bracket,” says DeGrazia. Taxes can vary dramatically based on the wording of an order, the type of asset divided or the completion of an appropriate form.

Practitioners who understand how taxes affect divorcing couples have a unique opportunity to structure agreements to improve their clients’ cash flow and the value of the assets they receive. In this arena CPAs can deliver solid financial benefits to clients.

TOWARD A HUMANE RESOLUTION
CPAs’ commitment to integrity and objectivity for litigation services practice as mandated by professional ethics and their clients’ trust in them sometimes position practitioners to mediate divorcing couples’ disputes without litigation. Many jurisdictions across the country use CPAs as settlement facilitators, arbitrators and mediators, says L. Gail Markham, CPA/ABV, a certified family mediator with Markham Norton Stroemer & Co. in Fort Meyers, Florida. She says, “CPAs are a natural fit for mediation in domestic relations cases.” She cites CPAs’ training and experience in problem solving and analysis as applicable strengths. “Our experience has taught us to evaluate inconsistencies and search for the missing pieces in each engagement,” she says. “Because the CPA profession, as a whole, continues to command a high level of trust, our work is well-respected and usually is given a great deal of consideration in the mediation process. Early and consistent advice from a CPA can save divorcing parties many thousands of dollars and a great deal of trauma.”

THE PLEASURE OF HELPING
Practitioners say they are careful to remain objective with divorcing clients but nevertheless take great pride in using their experience and skills to help clients organize their finances and get their new lives in order. Most CPAs have the knowledge to perform domestic relations financial consulting yet hesitate for fear of having to deal directly with a client’s distress or concern they won’t have a good enough grasp of the “rules of engagement” under local law. CPAs who wish to do divorce consulting can avoid emotional issues by dealing primarily with attorneys, and they can learn more about jurisdictional rules from local counsel, fellow accountants and their state bar associations.

Fact-finding interactions offer an excellent opportunity to learn about resources and events where CPAs can make gatekeepers aware of their services. Another way to market services is by teaching lawyers and other gatekeepers how CPAs can maximize financial strategies to give clients the best possible resources for starting over once the divorce is final. Says Stewart, “We quite literally hold our clients’ futures in the palm of our hand.”

Resources

Authoritative literature available to members at www.aicpa.org includes the following:

AICPA Code of Professional Conduct.

AICPA Statement on Standards for Consulting Services no. 1, Consulting Services: Definitions and Standards. (See AICPA, Professional Standards, CS section 100).

Some nonauthoritative literature available to members at the AICPA Web site includes:

Special Report 93-2, Conflicts of Interest in Litigation Services Engagements.

Special Report 93-3, Comparing Attest and Consulting Services: A Guide for the Practitioner.

Special Report 03-1, Litigation Services and Applicable Professional Standards (supersedes Special Report 93-1).

Technical consulting practice aids at www.aicpa.org and www.cpa2biz.com :

Consulting Services Practice Aid 93-4, Providing Litigation Services.

Consulting Services Practice Aid 95-2, Communicating Understandings in Litigation Services: Engagement Letters.

Consulting Services Practice Aid 96-3, Communicating in Litigation Services: Reports, A Nonauthoritative Guide.

Consulting Services Practice Aid 99-1, Alternative Dispute Resolution Services.

Small Business Consulting Practice Aid 93-3, Conducting a Valuation of a Closely Held Business.

AICPA conference:
National Conference on Advanced Litigation Services/Fraud
October 2 and 3, 2003
Fontainebleau Hilton
Miami Beach, Florida
More information is available at www.cpa2biz.com .

SPONSORED REPORT

Year-end tax planning and what’s new for 2016

Practitioners need to consider several tax planning opportunities to review with their clients before the end of the year. This report offers strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.

QUIZ

News quiz: IRS warning on cyberattacks and a change in pension rules

Once again, the IRS sounds the alarm about a threat from cyberthieves. See how much you know about this and other recent news with this short quiz.

CHECKLIST

Bolster your data defenses

As you weather the dog days of summer, it’s a good time to make sure your cybersecurity structure can stand up to the heat of external and internal threats. Here are six steps to help shore up your systems.