Finding Hidden Money with Tax Returns

 
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By Alycia Watt & Leah Wietholter

We recently posted a blog, First Steps in Finding Hidden Assets, which explained all of the different places one could start when looking through marital financial information. While most of those documents are fairly straightforward, we understand how confusing tax returns can be, especially for those who have never had to file in their relationship. In this blog, we are going to discuss the different ways spouses attempt to hide money and assets and where to find them on a 1040 tax return.

Form 1040

Anyone who works within the U.S. whether it be self employed, freelance, independent contractor, employed by someone else, or living off investments, needs to fill out a 1040. Depending on your marital income, you may also find forms attached called “schedules.” The schedules provide the more specific details behind the amounts reported on the 1040. If you’re looking for potential hidden assets, you may want to consider the following schedules: 


  • Schedule A: This schedule contains itemized deductions, real estate taxes, gifts to charity, and mortgage interest. One way to find a possible hidden asset is by reviewing the property tax section found on line 5c. This line provides a sum of all the property taxes paid on properties owned. While Schedule A does not itemize the properties by address, you can search your county property tax assessor’s records to identify the total property taxes paid on the properties you know about, and then reconcile those with the total on Schedule A line 5b. If the taxes being paid on Schedule A are higher than listed in the county assessor’s records, it is possible that there may be an additional property. 

    This same analysis works when you compare the mortgage interest listed on Schedule A line 8 to the interest reported by your mortgage company.

  • Schedule B: This schedule lists interest and dividends income received from bank accounts, brokerage accounts, partnerships, or S corporations. If you notice a financial account listed on this Schedule for which you are unfamiliar, you will want to work with your attorney (or spouse if you haven’t filed yet) to obtain the supporting account information and details.

  • Schedule C: This Schedule is used to report business income when  a person  owns 100% of the business. Schedule C lists the income and expenses for that company for that specific tax year. Income is listed under Part I, and expenses are listed under Part II. 

    One way spouses may attempt to hide an asset or understate income is by depreciating the total cost of an asset purchased in that year. For example, if you bought a $100,000 piece of equipment, there are tax provisions in place so you can expense the total cost of the asset in the year that you purchased it. This may drastically reduce your taxable income. If there is a Schedule C on the 1040, sometimes there is also a depreciation schedule that allows you to review line by line items, sometimes you can find items listed there that  aren’t supposed to be there. Most CPA firms do not provide an annual depreciation schedule to their clients; however, if you request it from your CPA, they have to provide the schedule to you.

  • Schedule D: This schedule points us to anything that was sold during the year including properties and stocks. This schedule lists long-term or short-term investments, when they were sold, and how much they sold for. It is not uncommon for spouses to sell off  investments or assets in divorce so they can appear to have fewer assets to divide. 

  • Schedule E: This schedule lists income from rental properties, partnerships, S Corporations, estates, trusts, and royalties (e.g., any oil and gas royalties). The Schedule E consists of two pages. The first page lists income and expenses from any rental properties, including the physical address, and any royalties received. The second page reports income from partnerships and S corporations, by company. If you are not familiar with an entity listed, you will want to work with your attorney, private investigator, or spouse to find out more about this company as it may be another source of marital income and assets.  

For more information on finding hidden assets by using tax returns, including the Form 1065 and Form 1120S, listen to The Investigation Game Podcast episode 6 with Shawna Robinson, CPA and partner at Woodrum Tate and Associates in Tulsa, OK. If you believe your spouse is hiding assets or understating income, and you need to call in the pros, you can schedule a free consultation here!

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