Date Posted: November 2015
By Bruce Roher
Q: How does a forensic accountant find hidden assets and income?
BR: Forensic accountants have many ways to find hidden assets and income. The first step is to establish and review an overall snapshot of the spouse’s assets and income. This is accomplished by developing a profile of the spouse’s assets and income sources, including real estate, businesses, investments, bank accounts and other assets.
The next step is to identify hidden assets and income. One way to uncover hidden bank accounts is to conduct a tracing analysis. This is where we examine all bank accounts and look for significant bank account transfers. If a transfer cannot be traced from one account to another, it may signal that the spouse has used an undisclosed account.
A second way is known as a lifestyle analysis. This is where we review all of the spending of a spouse and compare total spending to the reported income. If the reported income is significantly less than the spending total, and there were no explanations for the difference, for example, gifts, loan proceeds, inheritances or capital used, then this could prove that there is unreported income.
Another way is to examine when the spouse has obtained a bank loan either for personal purposes or to purchase a property or fund a business. In these situations, we obtain the bank loan application which will list the spouse’s assets and income. Often there are discrepancies between the assets and/or income disclosed to the lawyers versus what was stated on the loan application.
Q: What can a forensic accountant do if there is an allegation of unreported cash income?
BR: Although cash income can be difficult to prove, there are ways to estimate the amount of cash income. For example, in one of our past cases, the husband owned a night club and the wife claimed there was a large amount of cash sales. We proved there were substantial cash sales in two ways. First, we reviewed the personal bank statements, credit card statements and brokerage statements of the husband for several years. We determined that the husband was spending $300,000 per year, yet he only reported $60,000 of income on his personal income tax return.
Second, we reviewed the internal sales reports of the night club, which indicated that there were periods of time where no sales activity had been recorded and in fact the sales entries had been deleted by the husband in order to understate sales.
Q: If a spouse owns a business, how do you assess the true income of the spouse?
BR: There are two key aspects of assessing the true income of the spouse. First, the spouse’s corporation may be paying for their personal expenses. Personal expenses may include such items as meals, trips and car expenses.
The spouse has benefited in two ways. First, the spouse did not have to pay for the expense personally and was able to use corporate funds and second, the spouse paid for the expense without incurring income taxes. In order for the spouse to pay an expense personally, funds would have to have been paid to the spouse from the corporation either by salary of dividend, which would have incurred income taxes.
In these cases, we will prepare an analysis of the personal expenses and also add in a “gross up for income taxes” to reflect that spouse enjoyed a tax free benefit.
The second aspect is to assess whether or not there are profits that have not been distributed from the corporation and could be available for support. This is called “attribution of income.” Let me give you an example. A husband’s company could have earned profits of $500,000, after paying the husband a salary of $100,000. The husband’s personal tax return will show his income is $100,000, however, sitting in his corporation is another $500,000 of profits that were not distributed.
In these situations, we assess the level of profits that have not been distributed in the current year and in past years, and review various factors to assess whether or not there was a business need to retain profits in the corporation. For example, often there is sufficient working capital and there is no business need to retain cash in the business.
In these cases, our report would provide an opinion on the amount that is available to be attributed to the spouse.
Q: What advice would you give for someone who believes their spouse is hiding assets or income?
BR: The advice I would give to someone who believes their spouse is hiding assets or income, first and foremost, is that it’s important to consider the risk of not being successful in the efforts to locate hidden assets and income. In particular, you should consider the expected cost and timing of obtaining the necessary disclosures, access to the records and the investigation. In addition, you need to determine if the amount that you suspect is hidden warrants an investigation.
When I discuss these types of situations with clients, we review the overall cost and likely benefits of an investigation to help assess whether it is the appropriate course of action.