hidden assets Archives | CJA Forensic Accounting

When a client voiced strong suspicions that her soon-to-be ex-husband was hiding assets, her attorney investigated the claim but found nothing amiss. However, he hired a forensic accounting expert to help ensure his client would receive an equitable share of the marital estate. The expert turned up a trunkload of hidden treasure — undeclared cash income and property “stashed” under the names of the husband’s mother and siblings.

Deceptive spouses — and other parties to litigation — often are experts at hiding assets. To protect your client from such scam artists, you’ll need your own expert.

Gathering data

To begin their search for hidden assets, financial experts request information and records relating to the spouse’s employment and financial holdings. Details about all sources of income (including pending litigation and insurance settlements), and all banks, brokerage firms and other financial institutions where the spouse has held accounts, are critical.

Experts also need to know about the spouse’s lifestyle and personal spending habits, as well as his or her personal and business relationships. The individual could be funneling income or assets to family members, friends and business associates.

Tax returns can be a particularly rich source of information. Itemized deductions listed on Schedule A, for example, may suggest that the spouse is living beyond his or her apparent means, in turn raising the possibility of hidden assets. It’s important to investigate whether the deductions for property taxes, mortgage interest and charitable giving are proportionate to reported income.

Methods that work

Experts use one or more of several methods to ferret out assets:

Net worth. The spouse’s net worth (assets less liabilities) at the beginning of a period is compared with the ending net worth. Information about assets might be accessed through bank and brokerage records, tax returns, and credit applications.

Expenditure. This strategy is deployed by matching the spouse’s total personal expenditures during a period of time — using evidence from bank statements and canceled checks — against the available sources of funds. These sources can include salary, loans, gifts, inheritances and cash on hand at the beginning of the period.

Bank deposits. This method assumes that money is either spent or deposited. Thus, net deposits (deposits less transfers and redeposits) are added to cash expenditures to

calculate total receipts. Funds from known sources are then deducted to calculate the total funds from unknown sources.

Business owners pose particular challenges

If the suspected scammer is a business owner, he or she may try to use the company to mask assets and income. A deceptive spouse, for example, may use business funds to purchase personal assets, such as cars and real estate, or to cover personal expenses, such as mobile phone bills, insurance premiums or club membership dues. All of these expenditures can reduce the business’s net income, thereby reducing its value as a marital asset.

The business also could have unreported income. A forensic accounting expert will scrutinize:

* Actual expenses,

* Associated expected sales,

* Accounts receivable,

* Journal entry write-offs,

* Internal controls (and the owner’s ability to override them), and

* Expected profitability.

Finally, an expert will search for related-party transactions. These are important because they can indicate the owner’s attempts to divert income from the business.

What clients deserve

No matter how well-intentioned, clients and attorneys are unlikely to be able to find all of a deceptive spouse’s hidden assets or income on their own. Forensic accountants, on the other hand, are trained to gather relevant data, scour it for anomalies and prove that the opposing party is being dishonest. This is the kind of expertise your client deserves. CJA Forensic Accounting provides this type of expertise.

Experts look to tax returns in hidden-asset investigations

Business owners involved in divorce or engaged in fraudulent activity have plenty of motivation to manipulate their companies’ financial statements for their own ends. Fortunately, for financial experts such as forensic accountants and valuators investigating hidden assets, business tax returns aren’t so easy to misrepresent. In fact, these returns have some built-in protections that help ensure their accuracy.

Getting the real story

Taxpayers who falsify information on their returns risk being charged with tax evasion. In addition, many income and deduction items are reported directly to the IRS by third parties — such as employers, banks, lenders and brokerage firms — making it difficult to omit or alter them.

Tax returns are particularly useful if an expert can obtain them from several years early on in the investigation. Examining changes from one year to the next can provide valuable leads in the search for hidden assets or income sources.

Finding buried treasure

Many treasures to be discovered in tax returns are buried in attached schedules, including:

Form 1040, Line 7 — Income from wages, etc. This is where the taxpayer reports sources of income. If he or she receives wages from several businesses, it may be possible to discover previously undisclosed business interests. The attached W-2s also contain information about retirement plans and fringe benefits.

Form 1040, Line 8b — Tax-exempt interest income. This income may reveal other investment assets.

Form 1040, Lines 15 and 16 — Retirement plan distributions. These funds can be traced to determine whether they were rolled over into other tax-deferred plans or used for some other purpose.

Form 1040, Line 45— Alternative minimum tax (AMT). An entry on this line indicates the existence of tax preference items — deductions, credits and other tax benefits that are disallowed for AMT purposes. Obtaining more information about these items, which are listed on Form 6251, may lead to the discovery of hidden assets.

A potentially significant item is the exercise of incentive stock options, which may signal a sudden increase in the taxpayer’s net worth. Each of these items may provide clues about the taxpayer’s investments.

Form 1040, Line 73 — Refund. This line on previous years’ returns may reveal important information. Dishonest owners and unscrupulous spouses have been known to overpay taxes in previous years and then seek a refund after the dust has settled.

Schedule A — Itemized deductions. A comparison of real estate taxes (Line 6) with taxes on disclosed property may show additional income resulting from hidden real estate assets. Similarly, entries for state and local taxes (Line 5), personal property taxes (Line 7) and investment interest paid (Line 14) may reveal the existence of undisclosed assets.

Schedule B — Interest and ordinary dividends. It’s important to pay close attention to any foreign accounts or trusts reported in Part III. If the taxpayer has set up an asset protection trust in a foreign country with strict secrecy laws, this may be the only clue that such a trust exists.

Schedule C — Profit or loss from a sole proprietorship. Depreciation expenses listed in Part II may show that the owner has valuable business equipment. Entries for mortgage interest as well as pension and profit-sharing plans may reveal other undisclosed assets.

If insurance expenses are reported on Line 15, the types of insurance the business bought may be significant. Taxpayers sometimes use whole life insurance policies to hide assets.

Schedule D — Capital gains and losses. It’s important to review any capital transactions reported here and make sure the business has accounted for all sales proceeds. A large decrease in a taxpayer’s net worth from one year to another may indicate an asset sale.

Schedule E — Supplemental income and loss. Schedule E reports income from rental properties, royalties, partnerships, S corporations, estates and trusts. Entries here may reveal important information about the taxpayer’s assets and business interests. Income and expenses that seem suspicious or unreasonable may indicate that these entities are being used to conceal assets.

Leading to victory

Tax returns — again, especially several years’ worth obtained early in the process — can form part of a solid foundation to a successful legal action. Specifically, tax-related information can aid in the drafting of discovery requests that lead to victory.

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Forensic accountants confirm worst suspicions