- Whether your spouse is holding a secret brokerage account or increasing federal tax withholding to hide income, income tax returns offer a treasure trove of evidence.
- Sniffing out an affair? Tax returns, bank statements and credit card statements will show you the red flags.
Few people would voluntarily overpay the IRS by hundreds of thousands of dollars, but one retired accountant did exactly that in a bid to hide money from his wife.
The CPA behind this creative scheme was preparing for a divorce, said Peggy L. Tracy, a certified financial planner and owner of Priority Planning in Wheaton, Illinois.
The accountant's wife — then Tracy's client — became suspicious after noticing her husband didn't file the couple's tax returns for two years. After asking the IRS for a history of tax payments made, Tracy uncovered a surprise.
"His tax bill every year was about $40,000, but we found out he was putting away hundreds of thousands in estimated payment vouchers and just leaving the money there," Tracy said.
"He was parking the money with the IRS," she said.
In all, the retired CPA made more than $500,000 in extra tax payments, pulling the money from a brokerage account.
"His theory was that when he got divorced, he'd be single, he'd file his back taxes and get the money out," said Tracy. "We caught him and did the back tax returns, so it was about $200,000 in tax refunds for both."
When it comes to uncovering a spouse's hidden assets and income, your tax return just might be the key to chasing down that cash and getting an equitable split in a divorce.
Here's what you need to know.
Your individual income tax return and the forms you need to prepare it have more than just the details on the amount you and your spouse earned in a given year.
Form W-2, for instance, contains data on how much your spouse earns, the amount they save in workplace plans and what they're withholding in income taxes.
The cleverest of divorcees may stretch the truth about their after-tax income by throwing more money into a 401(k) plan, a deferred compensation plan or a health savings account — a tax-advantaged account you can use to pay for qualified medical expenses.
High deferrals into these and other savings accounts at work reduce take-home pay. Soon-to-be exes try to use this to argue for reduced alimony and child support obligations.
"They'll say they don't have any money, but they're paying this much into their 401(k) plan so that it lowers their support payments," said Christy Bastian, CPA and president of FVL Consultants in Marco Island, Florida.
"Looking at the paystub will tell you if there are undisclosed assets," she said. "It could indicate there's a retirement account." Such a find can be valuable in a divorce, as assets in a 401(k) can be divided through a qualified domestic relations order.
Here are two tax forms that might help you uncover hidden assets and secret spending: Schedule B, which contains details on interest and dividends, and Schedule D, which addresses capital gains and losses.
Both forms are a necessary part of filing your income tax return.
"Sometimes we find accounts because you were stashing away money, and there might be an interest income statement that comes in," said Tracy.
"As for capital gains and losses, are you taking money out of a brokerage account and not reinvesting it?" she asked.
You should also keep an eye out for Form 1099-R, which taxpayers receive when they've made distributions from retirement accounts.
"People don't want to look at their financial accounts on a monthly basis," said Tracy. "It gives people an opportunity to hide money because nobody is watching."
Entrepreneurs can be creative when it comes to squirreling away cash and hiding affairs.
"Sometimes they funnel money to a company that they set up innocently years ago when everything was fine," said Philip Segal, an attorney and founder of Charles Griffin Intelligence in New York.
In one case, a husband with a company in New York decided to form a second entity with the same name in Florida. His wife, Segal's client, suspected that her husband was having an affair with another woman in that state.
A search of corporate and business entities in Florida turned up an address for the business — which happened to correspond with the other woman's apartment, Segal said.
Though the company was listed at her address, there was no evidence the company did any business in Florida, he said.
Tax returns linked to the business can also spell out cash flow details, including unusual spending patterns.
"If you're in the midst of a divorce, you have document discovery and you can get into the tax records," said Segal. "Or if you have the same accountant, you can see the business tax records."
Watch out for the following:
● Your spouse's spending habits change: One of Tracy's clients had a cheating spouse who would buy both his mistress and his wife the same holiday gifts — including two furs. It wasn't immediately obvious because the credit card statement would show only one charge, Tracy said.
In another case, one of Tracy's clients socked away $30,000 over time just by taking out additional withdrawals at the cash register when buying groceries. She put the money in a safe deposit box.
● You're given an allowance: Your spouse might give you enough to spend and dissuade you from looking at the household's checking accounts. "If you're given a limited budget and you don't get access to financial information, that's a clear red flag," Bastian said.
● Your spouse is transferring money across different accounts: Cash going across different personal checking accounts or between different business accounts is fishy. Don't forget to keep an eye on those brokerage accounts, where spouses could take out large sums of cash.
"It's getting your head out of the sand and going with your spouse to the planner if you have one for yearly review," said Tracy. "Nobody should do a review without both spouses there, explaining the finances."