In many litigation contexts – such as marital dissolutions and fraud investigations – one party may have a financial incentive to hide personal assets or income. Identifying and quantifying these undisclosed or underreported items can be challenging. Fortunately, financial professionals know where to look and how to quantify what’s missing.
Searching for Clues
Experts often start their searches with a net worth analysis that looks at changes in a person’s worth, reconciling those changes with income and expenses. The first step is to reconstruct this data, which may involve some detective work. Experts search for clues in a variety of places, including:
- Bank Records,
- Real estate and court filings,
- Payroll records,
- Expense reports,
- Phone bills,
- Insurance documents, and
- Credit reports.
Employment and loan applications also can provide insights, including current and previous residences, family members’ names, and previous jobs. Experts then interview people such as the subject’s accountants, former spouses, former business partners and real estate agents.
Analyzing Financial Data
One approach to detecting hidden assets is to compare the subject’s net assets at the beginning of the year to those at year end, adding known income and subtracting known expenses. A result other than zero indicates income from unknown sources.
Another approach is the expenditures method. Here the expert looks for discrepancies between the subject’s expenditures and his or her sources of funds — including salaries, commissions, investment dividends, inheritances, loans, gifts and cash on hand at the beginning of the year. If the subject’s spending exceeds the available funds, an unknown source of funds exists.
Complicating matters, however, is the fact that many people pay cash for expenses such as entertainment and meals and don’t keep the receipts. And if it appears that the subject is using skimmed funds to pay for cash items, a more in-depth investigation will be necessary.
A third way to uncover hidden assets lies in a careful examination of bank deposits. This method relies on the assumption that all money is either spent or deposited. The expert starts with net deposits to all accounts during the year and adds cash expenditures to arrive at total receipts for the year. If that amount exceeds funds from known sources, the difference represents an unknown source of funds. Bank-deposit scrutiny is particularly appropriate with cash-intensive businesses.
Examining Tax Records
Tax return schedules also can contain a wealth of useful information. For example, Schedule A (itemized deductions) covers real estate and personal property taxes. The expert checks that reported amounts correspond to the underlying property. If they don’t, further investigation may lead to undisclosed assets. Whether the subject has incurred alternative minimum tax liability could also be revealing.
Entries regarding state and local taxes may reveal income (or income-producing property) in other states. Experts can also glean critical information from Schedules B (interest and ordinary dividends), C (profit or loss from business), D (capital gains and losses) and E (supplemental income and loss).
Benefit of the Doubt
When it comes to hidden assets, the natural inclination is to blame someone. While a contentious lawsuit may lead one party to wrongfully hide items of value, assets sometimes are obscured by conventional asset protection measures — and no wrongdoing has necessarily occurred. A financial professional can help you achieve full and complete disclosure.
TheKFORDgroup litigation team holds extensive knowledge and experience in expert witness engagements, forensic accounting, and business valuations. Our experts are trained and experienced in the litigation process. We can help you or your client solve the mystery of missing assets in your next case. For more information, please call us at 210-340-8351.
Additional information included in this report was provided by PDI Global / Thomson Reuters © 2022