- Income tax returns hold plenty of information on brokerage accounts, excess withholding to hide cash and more.
- Your tax returns, brokerage statements and bank statements will give you the details.
- There were 787,251 divorces and annulments in 2017, according to the most recent data available from the Centers for Disease Control and Prevention
Most people would blanch at the idea of voluntarily overpaying the Internal Revenue Service more than half a million dollars.
A retired accountant chose to write those huge checks to the taxman in a bid to hide money from his soon-to-be ex-wife, according to Peggy L. Tracy, a certified financial planner and owner of Priority Planning in Wheaton, Illinois.
The wife — who was Tracy's client — knew something was up when her husband didn't file their tax returns for two years.
The planner asked the IRS for a history of tax payments and turned up 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."
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.
Your individual income tax return and the forms you need to prepare it hold a treasure trove of data.
For instance, Form W-2 breaks out the amount your spouse earns, how much he or she saves in a workplace retirement plan, and the amount withheld in taxes.
Sneaky spouses can cut their after-tax income by tossing 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.
This would reduce take-home pay, which soon-to-be-exes can use 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."
Cash in a 401(k) can be a valuable asset in divorce; you can split it through a qualified domestic relations order.
Two tax forms can help you blow the cover on secret accounts.
"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.
Watch out for Form 1099-R, which taxpayers get when they've made withdrawals from retirement plans.
Entrepreneurs can use their businesses to cover up their bad behavior.
"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, the attorney 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."
Keep an eye out for these suspicious behaviors.
Transferring money across accounts: Watch out for transfers of cash from one account to the another. Don't forget that spouses can also take large sums of cash from brokerage accounts.
Spending patterns begin to change: One of Tracy's clients had a cheating spouse who would purchase his wife and mistress the same gifts — including two furs.
It wasn't immediately obvious because the credit card statement would only show one charge, Tracy said.
Another one of her clients stashed $30,000 over time by taking out additional withdrawals while checking out her groceries.
She hid the cash in a safe deposit box.
Receiving an allowance: A spouse who wants to dissuade you from getting into the household checking accounts has something to hide.
"If you're given a limited budget and you don't get access to financial information, that's a clear red flag," Bastian said.