Most people are simply not aware of the many ways a spouse can hide money and potentially get away with it.
Divorce lawyers often hire forensic accountants to investigate the income and assets of their clients’ spouses. In divorce cases, allegations of hidden money and income and shielding assets and plans to misrepresent business profits are common. Experts can trace most diversions of assets – it’s just a matter of knowing what to look for along the paper trail.
The first step for an attorney or a forensic accountant in discovering hidden assets is to determine the “realization” point or moment when someone knows they’re getting divorced. They understand they can face financial harm and that they should take steps to plan for it. You look for that realization point and then check for pattern changes, such as sudden increases or decreases in income to lead you to the evidence you need.
Common Ways People Can Conceal Assets
In my experience, most people do the easy schemes. The many ways spouses disguise assets include:
- Hiding cash
- Making income appear lower to avoid support
- Shielding assets to avoid splitting them in a divorce
- Reducing business or other asset values to support a lower financial settlement
Hiding money is the most common method people associate with these techniques. However, the other ways listed above all have the same effect on the other spouse. If they’re not discovered, they result in:
- Hidden money or assets
- Lower asset valuations for reduced property and/or support settlements
Sometimes, the money may actually end up somewhere in the marital home. As attorney Peter Barlow of Kates & Barlow, PC said, “I had one where my client had found $35,000 hidden in the rods in the closet, and then wound up finding more money behind the medicine cabinet in the bathroom, and all other places. You’ve got to be creative in anticipating where things might be.”
The spouse is usually the only one involved, but at other times, he or she gets help from a trusted friend or family member.
Other Forms of Fraud
Some of these schemes, such as fake business invoices to divert money, are also forms of fraud. Legally, if a lawyer or a judge spots evidence of fraud, they must report it as a crime. Verification from third-parties and ratio analysis for sudden changes are among the ways to confirm this.
One of the most common methods spouses commit fraud is through misrepresenting the difference between cash flow and income. I see this all the time. Another is transferring assets. Let’s say that the divorcing spouse has an uncle who owns another business. The spouse decides to write checks out to their relative, which we can find through looking at bank statements.
Changes in accounting methods, however, aren’t often known. This can show up as a decrease in income. It will appear on corporate tax returns and financials, and as you dig down, you discover when and why and oftentimes it doesn’t add up. It’s a completely unnecessary transaction designed to shelter income or downplay profitability.
Overpaying taxes is another tactic that’s not only overlooked, it’s also hard to spot because you often don’t know until you get the records from the IRS. Lawyers tend to use their clients’ returns.
Your search for evidence should be targeted and methodical; it takes a lot of focus to get to the truth, but if you find proof, you’re truly getting justice for your client.
Learn more ways people hide assets in our webinar, Attempts by Divorcing Spouses to Hide Money: An Attorney’s Guide to Identifying the Way People Hide Money and Understate Income.
“With all of the articles and webinars that have come along with the membership, we are kept up to date on changes in the law (especially the new tax laws), new products, and new perspectives on how to address complicated estates.” – Daryl G. Weinman, AACFL member Daryl G. Weinman of Weinman & Associates, PC