Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Is Your Spouse Hiding Assets? A Review of Tax Returns May Uncover Some Red Flags

If you are in the process of divorce and believe your spouse may be hiding assets, a review of your tax returns may provide some indication of those assets.  Of course, the spouse who controls the preparation of the tax return does not always report income relating to hidden assets, (hence the word “hidden”).  However, often spouses who are hiding assets are actually compliant in reporting the income or expenses relating to those hidden assets on their tax returns.  (Perhaps, they are more scared of the IRS than their soon-to-be ex.)  I have put together a brief list of items to look for on your tax returns, which may suggest the presence of hidden assets.  If you believe your spouse is hiding assets from you, a forensic accountant can assist you, by using more detailed forensic accounting procedures to search for those assets.

Schedule A – Itemized Deductions

• Review real estate taxes and mortgage interest for indication of undisclosed property.
• Look for investment interest expense which may suggest hidden investments.
• Note safe deposit box expenses which may indicate an undisclosed safe deposit box and hidden assets.

Schedule B –  Interest and Ordinary Dividends

• Review all names of payers to determine if there are assets not previously disclosed.
• Note any foreign bank accounts or foreign income which may suggest hidden assets in offshore accounts or a Foreign Tax Protection Trust.
Schedule D – Capital Gains and Losses
• Review all reported investment transactions, as you may discover an undisclosed liquidation of assets.
• Look for matching assets to confirm dividends that should have been received and or/reported.
• Note any capital loss carry forwards, as this is a community asset.

Schedule E – Supplemental Income and loss (From rental real estate, royalties, partnerships, S Corporations, estates, trusts, REMIC etc)

• Review all S-corporations and partnerships reporting pass-through income or loss to determine that all ownership interests have been disclosed.
• Review all rental properties listed.
• Review any reported royalties and determine if the asset(s) generating royalties has been disclosed.
• Note any estate and trust income, as the spouse may be an income beneficiary to estate or trust.

Other Items to Look For:
• Retirement Distributions or Contributions;
• Gambling Winnings;
• Stock Option Transactions;
• Amounts reported as “Other Income” (Line 21);
• Overpayment of Income Taxes/Tax Refunds (Sometimes used as a method to divert overpayments into following year’s tax return after the divorce is finalized).