Finding hidden income or assets in divorce is one of the most challenging yet rewarding service that a CDFA™ or CPA can provide. It can alternatively be frustrating and expensive for the client, providing little or no answers.
In any forensic case, I always alert my clients to the probability of little or no positive findings, “I can go down any “rat hole” that you want and find nothing.” The objective is to quantify the financial risk and reward and curtail the client-spouse’s continuing losses. Each engagement is different; however, I consider the following tasks to be crucial to the investigation:
Reviewing at least the last three year’s personal tax returns (including W2s) can provide a wealth of information and/or Discovery, or Interrogatory questions prepared for the divorce attorney. An experienced CPA can estimate the annual, after-tax cash flow to the family in a relatively short period of time. This leads to a comparison of the cash flow to Affidavits or budgets prepared by the spouses to corroborate lifestyle expenses.
Other areas of “interest” include a review of interest and dividends, retirement plan distributions, Schedule E rental and/ investment income and losses, and itemized deductions. Investigation of these areas can provide indications of dissipated assets, valuation issues, more red flags, or understated income.
Financial statements and/or business tax returns, including Schedule C for an unincorporated business are reviewed for unusual, non-economic fluctuations in income, elimination or adjustments for non-cash expenses, unreasonable compensation, personal expense deductions, unnecessary expenses, officer loans, fraudulent employees, etc. If the employee-spouse is an officer or highly compensated individual for a non-public or public large company, employment contracts are needed to ascertain additional benefits that are not reported on the W2.
Has the home been refinanced or has investment property been purchased? Loan or mortgage applications usually present the best financial condition of the borrowers. Assets, income, and debts can be corroborated or identified in these documents. Most times the problem is locating the information, which may have to be subpoenaed from the Title Company or financial institutions.
Interviewing the client and possibly his or her spouse and listening is one of the most important steps in the financial review. In a business situation, the nonbusiness spouse should have some knowledge of the business. They may know the names of major customers or those with other financial or business relationships. Discussions can also lend insight as to the family’s financial lifestyle, property valuations, and unreported sources of income.
John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. Faggio Financial provides comprehensive divorce financial analysis and planning, and forensic services. Email or call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that you need.