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Hidden Assets in Divorce Cases Navigating Complexities in Tax Returns and Financial Statements to Uncover Assets and Income
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WEDNESDAY, OCTOBER 10, 2012
Presenting a live 90-minute webinar with interactive Q&A
Bruce Friedman, Partner, Paule Camazine & Blumenthal, St. Louis
Connie Yi, Attorney, CPA, Law Offices of Connie Yi, Pleasanton, Calif.
Thomas E. Hilton, Partner, Director Forensic and Valuation Services, Anders Minkler & Diehl, St. Louis
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Welcome
Thomas E. Hilton, MSF, CPA/ABV/CFF, ASA, CFA, CGMA
Anders Minkler & Diehl LLP
St. Louis, MO 63101
314-655-5515
Three important roles of a forensic accountant in
a divorce proceeding
Role #1 – Primary Financial Investigator
Role #2 – Expert Witness
Role #3 – Consultant
6
Badges of fraud are behaviors, conditions or
evidence of the possible existence of fraud
The existence of one badge of fraud may not
indicate fraud, but the existence of several may
direct the forensic accountant and attorney to
specific areas for additional investigation
7
Categories for Badges of Fraud
Behavioral Indicators
Inappropriate Transfers
Lifestyle Issues
Business
Diverted or Hidden Income
8
Examples – Behavioral Indicators
Spouse is secretive about finances
Spouse redirects mail from home to office
Spouse pays cash for big ticket items
Spouse lies on loan applications
Spouse cheats on income taxes
Spouse makes threats against the expert
9
Examples – Inappropriate Transfers
Spouse pays legal fees for divorce from business
account
Spouse has unusual loans or note transactions
Spouse conducts multiple transactions involving
currency at levels just under $10,000
Spouse frequently refinances mortgage
10
Examples – Lifestyle Issues
Spouse lives a lifestyle in excess of reported income
Spouse purchases new “toys” (cars, boats, planes,
etc…) which are above standard of living
Spouse exhibits significant flash and style
Spouse abuses drugs
11
Examples – Business
Spouse has complicated multiple entity business
investments
Spouse has nonemployees on business payroll
Spouse takes loans from the company
Spouses business postpones income
Spouse sells business during the divorce proceedings
12
Examples – Diverted or Hidden Income
Spouse’s income declines with the onset of marital
difficulties
Spouse conducts financial dealings with parents,
siblings, adult children or close friends
Spouse has multiple bank or savings accounts
Spouse travels to offshore havens (Cayman Islands)
13
The purpose of the personal lifestyle analysis is
to determine whether a spouse is concealing
assets or income that should be counted in
arriving at a fair property settlement and to
assist in evaluating spousal support.
14
Review of Tax Returns
Form 1040 – Personal Tax Return
Form 1041 – Trust Tax Return
Form 706 – Estate Tax Return
Form 709 – Gift Tax Return
15
Review of Form 1040
Lines 15 & 16 – IRA & Pension Distributions
▪ Should match to 1099-R’s
▪ Remember – just because the line is blank does not mean that
IRA’s and/or pensions do not exist, it simply means there was
no distribution during the year
16
Review of Form 1040
Line 21 – Other Income
▪ Should review sources of other income
▪ RED FLAG – GAMBLING WININGS
▪ Should match to Form W-2G’s
17
Review of Schedule A
Lines 6 – Real Estate Taxes
▪ Confirm with county records
▪ Could indicate additional real estate owned but not previously
disclosed
Lines 8 – Other Taxes
▪ Personal property taxes – existence of cars, boats,
motorcycles, trailers, etc…
18
Review of Schedule A
Lines 10 – Home Mortgage Interest
▪ Should match to 1098’s provided by lender
▪ Could indicate additional real estate owned but not previously
disclosed
▪ Additional investigation needed if mortgage interest is being
paid to someone other than a financial institution
19
Review of Form 1040
Lines 61 & 62 – Taxes (Withheld & Estimated)
▪ Watch for excess withholdings and accelerated estimated tax
payments during year of divorce
▪ Spouse looking to hide cash and receive refund after divorce
has been finalized
20
Review of Schedule A
Lines 23 – Other Expenses
▪ Safe deposit box – deduction indicates the existence of a safe
deposit box which will need to be examined
▪ Investment expenses – indicates the existence of investments
accounts which will need to be confirmed (compare to
Schedule B)
21
Review of Schedule A
Lines 28 – Other Miscellaneous Deductions
▪ RED FLAG – GAMBLING LOSSES
▪ Gambling losses can only be deducted to the extent of
gambling winnings reported on Form 1040, Line 21
▪ May need to request gambling records from casinos
22
Review of Schedule B
Part I – Interest
▪ Should match to 1099-INT’s
▪ Additional investigation needed if interest is being received
from someone other than a financial institution
▪ Caution – tax-exempt interest is reported on Form 1040, Line
8b – not on Schedule B
23
Review of Schedule B
Part II – Dividends
▪ Should match to 1099-DIV’s
Part III – Foreign Accounts & Trusts
▪ RED FLAG – Possibility of hidden assets in offshore accounts
24
Review of Schedule C
Type of business – is it a cash business?
May need to request additional documents:
▪ Bank account
▪ Credit cards
▪ Investment accounts
▪ Business contracts
▪ Appointment book
▪ Loan documents
▪ Insurance records
25
Review of Schedule C
Line 1 – Gross receipts (cash business)
Line 9 – Car and truck expense (business auto)
Line 13 – Depreciation (personal assets used in
business)
Line 16a – Mortgage interest (ownership of building)
26
Review of Schedule C
Line 24 – Travel, meals and entertainment (personal
expenses)
Line 26 – Wages (payment to nonemployees)
27
Review of Schedule D
Line 1 – Short-Term Capital Gains
Line 8 – Long-Term Capital Gains
▪ Should match 1099-B’s
▪ Indicates the existence of investments accounts which will
need to be confirmed (compare to Schedule B)
Could indicate liquidation of assets
28
Review of Schedule E
Part II – Income or Loss From Partnerships and S
Corporations
▪ Indicates ownership interest in a passthrough entity
▪ May need to have a business valuation
▪ May need to request additional documents:
▪ Tax returns
▪ Financial statements
▪ Bank accounts
29
Review of Schedule D
Line 6 – Short-Term Capital Loss Carryover
Line 14 – Long-Term Capital Loss Carryover
Line 21 – Combined Loss
▪ Capital loss carryovers will need to be considered before
finalizing divorce
30
Review of Schedule E
Part III – Income or Loss From Estates and Trusts
▪ Indicates beneficiary interest in an estate or trust
▪ May need to request additional documents:
▪ Trust agreement
▪ Trust tax returns
▪ Brokerage accounts
31
Review of Schedule E
Part I – Income or Loss From Rental Real Estate
▪ Indicates presence of additional real estate
▪ How is rental income received – check or cash?
▪ May need to request additional documents:
▪ Bank account
▪ Rental agreements
▪ Loan documents
▪ Insurance records
32
Review of Schedule F / Form 4835
Schedule F – Profit or Loss From Farming
Form 4835 – Farm Rental Income and Expenses
▪ Potential ownership of farmland
▪ Business activity related to farming
▪ May need to request additional documents:
▪ Bank accounts
▪ Lease agreements
▪ Loan applications
▪ Insurance records
33
Review of Form 6252
Used to report income from the sale of real or
personal property if taxpayer will receive any
payments in a tax year after the year of sale
May need to request sales agreement and
amortization schedule
34
Thomas E. Hilton, MSF, CPA/ABV/CFF, ASA, CFA, CGMA
Anders Minkler & Diehl LLP
314-655-5515
35
Bruce E. Friedman, Paule, Camazine & Blumenthal, P.C.
Hidden Assets in Divorce Discovery and Avoidance
✤ Income, often cash, that is unreported on tax returns or financial statements.
✤ Overpayment of income taxes.
✤ Overpayment of credit cards.
✤ Collusion with employer to delay payment of bonuses, stock options, or raises until after the divorce.
✤ Delay of signing long-term business contracts until after the divorce.
✤ A custodial account set up in the name of a child, using the child’s social security number.
✤ Investment in “bearer” municipal bonds or Series EE Savings Bonds with unreported interest.
✤ Money paid from the business to someone close (like a father or girlfriend) for services not rendered.
✤ Salary paid to a nonexistent employee from a business.
✤ “Debt repayment” to a friend or family member.
✤ Real estate or vehicles “given” away.
✤ Cashed stocks/bonds, withdrawals/receipt of money immediately deposited, invested, or used to buy
something valuable
✤ Expenses paid for paramour: gifts, travel, rent, etc.
✤ Undervalued or overlooked antiques, artwork, hobby equipment
What am I looking for?
37
What info do I need to start?
✤ Personal identification
✤ Legal name, nickname, abbreviations, common misspellings, aliases
✤ Current and all know previous addressess
✤ Social security number/ DOB
✤ Names and addresses of family members
✤ Name and address of paramour
✤ Business Information
✤ Name/address of entity, company, corporation, partnership, LLC, etc.
✤ Name/address of executives
✤ Banks and other financial institutions and account info 38
Where do I look?
✤ Income tax returns- personal, for any business in which a party has any ownership interest and for trusts
✤ Financial statements
✤ Savings accounts and money market funds
✤ Checking account statements and cancelled checks
✤ Bank statements to analyze deposit of cash and checks, ATM withdrawals, and to whom checks are
written
✤ Off shore accounts
✤ Cash flow tracing
✤ Credit reports and credit card receipts
✤ Insurance statements for cash value of insurance policies
✤ Loan Applications and Personal Net worth Statements
✤ Business Financial Records
✤ Balance Sheet and Income Statements, Detailed General Ledgers organized by category, invoices
✤ Accountant’s Work Papers
✤ Government and Public Records/ Electronic Research (including state level)
Lifestyle Analysis
39
How do I obtain that?
✤ Talk to your client
✤ Discovery
✤ Interrogatories
✤ Depositions
✤ Subpoenas
✤ Requests to Produce
✤ Motions to Compel
40
How do I
examine that? Tax Analysis
Financial Statement Analysis
Business Analysis
Cash flow Analysis
Lifestyle Analysis
41
42
How do I avoid dissipation of assets?
✤ Restraining orders and Injunctions
✤ A prohibition from the court or an affirmative injunction requiring a specific activity.
✤ Temporary Restraining Orders
✤ A preliminary injunction granted to prevent immediate and irreparable injury. Is there a statute or local court rule imposing and “automatic restraining order” on dissipation, transfer, etc.?
✤ Ex Parte (Emergency) Motion for Temporary Restraining Oroder
✤ Imminent risk of substantial harm
43
Tracing
✤ Lawyer or forensic accountant conduct tracing analysis of sources and uses of funds, including pay roll, distributions from flow through entities, liquidation of assets, improper categorization of expenses, costs of goods sold, etc. to conceal true use of funds. Tracing includes analysis of bank and other financial records, including statements, canceled checks, deposit slips, wire transfer confirmation, etc.
44 Examples
1) T206 Piedmont Honus Wagner card 3) Hummel Figurine 2) Company jet
4) Business partners 5) Cash 6) Vacancy
Hidden Assets in Divorce Cases
By: Connie Yi, Esq./CPA
Law Offices of Connie Yi PC
601 Van Ness Avenue Suite 2050
San Francisco, CA 94102
October 10, 2012
How to Use Accountants and Other Financial Experts
46
Financial Experts
• Financial advisors
• Accountants
• Forensic Accountants
• Business Valuation Analysts
47
Different Credentials
• CFP – Certified Financial Planner
• CPA – Certified Public Accountant
• Business Valuation credentials (NACVA,
AICPA, IBA)
48
Lines of Communication
• Engagement letter
• Divorce attorney from/to experts
• Client from/to experts
49
No Tax Returns
• Accountant to compile the financial data
from bank statements/credit card
statements/checks
• Prepare the returns
• Forensic Accountant review the data
50
Cash Business?
• Cash businesses – restaurants,
contractors, convenience stores…
• Look for employee records, sub-
contractors, store receipts…
• Sales tax returns
• Payroll tax returns
51
Offshore Bank Accounts
• IRS compliance regulations
• FBAR report
• Foreign tax returns
52
Other Foreign Assets
• Local legal counsel
• Avoid breaking the law in foreign countries
• New IRS regulation for reporting
53
Thank You!
Connie Yi, Esq./CPA
Law Offices of Connie Yi PC
www.ConnieYiLaw.com
54
