Finding the Hidden Assets

I have advised many clients on divorce and the related tax issues, the majority have been women and invariably, they tell me their husbands may be hiding assets.

These clients also fall into three categories: First, there are those who are looking to divorce in as efficient and friendly way as possible. They ask for advice on things like property transfers, deductibility of legal fees and alimony payments. The seek guidance on the process and what to expect. They are looking for information that allows them to have better control of the process and hopefully the outcome. They also want to confirm that the assets their husbands are declaring are complete and accurate.

Then there are those who are already divorced. They need guidance on how to best utilize their settlements. They may be the spouse who did not drive the finances during their marriage and they now need to learn the basics of budgeting, money management and investing. They may also be in the unfortunate circumstance of having to enforce their agreement and to compel their former husbands to pay up overdue payments of alimony or child support.

Not infrequently, however, there’s a third category: women going through down-and-dirty divorces that disrupt their lives in unpleasant and expensive ways. They may be dealing with assets with which they are not familiar or that might include a private business where they are neither working or an active owner. They are afraid that the income from these investments or businesses may be underreported or even removed and hidden. Lots of them want to know whether it’s worth hiring private investigators to track down any hidden assets. I generally say NO.

I then alert them to an alternative: The information they need to start with is often tucked away in their filing cabinets. It is their tax returns. They can begin to gather a good part of what they need from the separate schedules submitted with the returns they filed jointly with their husbands.

When they look into those 1040s, they may discover a list of the names, amounts and sources of income that would reveal asset locations and serve as clues as to where to look. Here’s what to look for:

Schedule B. This schedule requires listing the names of mutual funds, brokerage companies, banks and other sources of dividends and interest. At the bottom of Schedule B are questions about the existence of foreign financial accounts and trusts.

The IRS doesn’t ask for a Schedule B from individuals who receive less than $1,500 in income from interest and dividends. Instead, the IRS tells them to list their totals for those kinds of income on the first page of Form 1040. Different rules, however, apply to taxpayers with foreign financial accounts and those involved in certain foreign trusts. They must submit Schedule B, regardless of the level of dividends or interest income.

All is not lost if there’s no listing of dividend and interest amounts on Schedule B. True, it becomes harder for a wife to discover her husband’s investments or bank accounts. Still, just listing totals of interest and dividend income on Form 1040 reveals that an ex-husband owns assets that generate interest and dividends, at least during the year covered by the return. This, in turn, gives women a starting point for where to look for assets held in their husband’s name.

Schedule D. This discloses capital gains and losses from sales of fund shares, individual stocks and other assets. The Schedule D reports profits or losses from sales of some stocks. The details of the sales establish the time frame that the shares were owned. There should be detailed buy and sell dates or at least the information detailing if they were short of long term gains, that is held less than or more than a year. The next logical question is what happened to the sales proceeds—and what other investments does he own?

Schedule E. Here, taxpayers disclose income or losses from the following sources: rental real estate (including the type and location) and royalties; estates and trusts; and partnerships and S-corporations, which are companies—taxed much the same way as partnerships are—that pass profits or losses through to their shareholders, who pay taxes at their own individual rates.

Suppose the Schedule E reveals rental income. If so the identity of the property will be listed. : In partnerships and S-Corps the entity might continue to generate income for the ex-spouse in question. The companies themselves will also have value.

Schedule C: Sole proprietorships and some LLCs will file their profits on a Schedule C that is included with their personal returns. These can be the most difficult to decipher and it may require an accountant who has auditing skills to confirm that all income is being declared and that he expenses declared are reasonable. These accountants are called forensic accountants and although expensive may be worth the fee if the concerns of hidden income are substantial.

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