Whenever a client tells me that her husband has said, "We don't need lawyers," I become wary. When he is self-employed, I become downright suspicious. If his career is in high finance, my suspicion grows twofold.
My reaction is based on years of seeing this same pattern play out. I'm not a financial divorce specialist, but I am an experienced divorce therapist and one of the main reasons I began working with people (primarily women) in this realm is that I saw the less financially savvy spouse or the "outspouse" (the term used by the court for the spouse who does not own the business from which income may be hidden) fall victim to the spouse in charge of the finances.
All too often, the reason the knowledgeable spouse doesn't want attorneys or accountants involved is that they don't want their schemes to be uncovered.
Divorce is hard enough, especially if an affair is involved, but add to it an additional layer of deception and betrayal and it can make the trusting spouse wonder if the entire marriage had been a sham. It's nothing short of devastating.
People hide income to avoid paying taxes -- a federal crime -- and, during a divorce, people hide income and assets to avoid paying higher child and spousal support.
In March of this year, a new book came out by forensic accounting expert, Mark Kohn. The book is entitled How They Stash the Cash and it is filled with anecdotes from some of Mark's cases. The book provides the tools and methods used by most people when they hide income. These include having two sets of books, hiding files in secret places, and funneling money into hidden business entities.
Mark feels strongly that hidden income can be uncovered and the outspouse can receive his or her fair share of income.
If you are concerned that your spouse is covering up finances, consult with your attorney first to make sure that a search would be worth your time and money. Forensic accountants can be quite costly so you'd need to weigh whether you'd want to pursue $20,000 in assets if it was going to cost you $10,000, for example. Some people would absolutely pursue that while others may not feel it's worth it.
Some Red Flags to Watch For
1. If your spouse is self-employed and/or more knowledgeable about the family finances than you are and is overly averse to using attorneys in your divorce.
2. Look at the lifestyle and compare this with the reported income. If there is a mismatch, further investigation is warranted.
3. Look at the ratio of living expenses to income. If a mortgage payment is 75 percent of the reported income, it's a good bet that there is hidden income.
4. Observe whether a business owner has multiple tax entities that do not seem to be necessary.
5. Observe whether there are unusual business expenses. In one of Mark's cases, a business expensed $15,000 for a transplant of four trees -- but the business operated in a treeless industrial park. Upon further investigation, it was revealed that this was a personal expense.
Why Doesn't the IRS Catch These People?
According to Mark, there are four main reasons that the IRS does not usually uncover hidden income, which is now estimated to amount to $2 trillion, annually:
1. The IRS does not hire private investigators and issue subpoenas at early stages of their review.
2. The IRS is discouraged from cases in which the taxpayer already has large net operating losses, which often is the case when income is hidden. (Because the true income is hidden, the business reports losses.)
3. The IRS does not have access to lifestyle information, from which a discrepancy between lifestyle and income could be noted.
4. The IRS does not usually investigate cases when a taxpayer is already reporting high income.
Mark's advice for those who believe their spouse is hiding assets/income:
1. Hire a private investigator. While private investigators can be expensive, they are useful in obtaining physical observations or documentary support.
2. Dig through the garbage -- a treasure trove for people looking to find hidden income.
3. Search for hidden files. Hidden income usually manifests itself as income that is hidden from the IRS, but it usually is not completely hidden. Real numbers usually exist somewhere but you may have to hire an expert to find them.
Mark Kohn's book, How They Stash the Cash, can be ordered in print or kindle editions from Amazon.com.