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Playing Detective: Using Tax Returns to Uncover Hidden Divorce Assets

Dec 29th 2014
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Divorce expenses can soar, especially when spouses start suspecting each other of hiding property. Consider what happens when husbands or wives hire private investigators to track down assets concealed by their future exes. Fees to find those hidden assets can add up to many thousands of dollars, as I can confirm from my work as a tax lawyer and investigator. Accountants should know what to expect if push comes to shove with one of their clients—there are tax angles here.

One of my more memorable clients was a woman whose divorce proceedings had become horrendously prolonged and contentious. A dozen or so years ago, she shelled out $15,000 just to have a private eye tail her spouse, a medical professional and a serial philanderer. The sleuth discovered a safe deposit box rented by the husband in his aunt’s name and crammed with nearly half a million in greenbacks. That $15,000 proved to be savvy spending; unearthing the concealed cash compelled the husband to increase the wife’s divorce settlement. Wisely, he wanted to avoid court testimony about cash payments from patients—information about income unreported on tax returns that the judge might routinely have passed on to the IRS.

Incidentally, there was no deduction for the $15,000. Generally, the cost of a divorce is nondeductible. However, there’s a limited exception for the part of the expenses specifically allocable to tax advice in connection with a divorce, as well as for legal fees to obtain taxable alimony.

Not all searches for hidden assets are that dramatic—or expensive. Fortunately, there’s a no-or low-cost source of information for spouses who are compelled to litigate their divorces or for already-divorced spouses who seek to recover overdue payments of alimony or child support. And frequently the means for unearthing this information is tucked away in their file cabinets—unbeknownst to those seeking the information. This is because still-marrieds and ex-spouses can glean a good part of what they need from the separate schedules submitted with their jointly filed federal tax returns.

Indeed, a treasure trove of names and amounts that could considerably shorten searches for hidden assets can be found in the 1040 forms, as follows.

1. Check the Schedule B. This schedule requires listing the names of mutual funds, brokerage companies, banks, and other sources of dividends and interest. At the bottom of Schedule B are questions about the existence of banks and financial accounts in foreign countries or foreign trust transactions. Not everyone will have a Schedule B, however. For those whose interest or dividend income is less than $1,500, the totals for dividend and interest income are listed on the first page of Form 1040. Taxpayers with bank or other financial accounts in foreign countries and those involved in certain foreign trusts have to continue filing Schedule B, regardless of the level of dividends or interest income.

If the dividend and interest amounts aren’t listed on a Schedule B, this can make it harder to find out where the investments or bank accounts are. But just listing totals of interest and dividend income reveals that an ex owns assets that generate interest and dividends, at least during the year covered by the return. This, in turn, gives spouses endeavoring to find hidden assets a starting point for their quests.

2. Check the Schedule D. This schedule discloses capital gains and losses from sales of fund shares, individual stocks and other assets. In other words, if the husband has listed a profit or a loss from a stock sale, that establishes that he has owned—and unloaded—that stock. Chances are he owns more.

3. Check the Schedule E. This schedule discloses income or loss from the following sources: rental real estate (including the type and location) and royalties; partnerships and S corporations; and estates and trusts.

So if Schedule E reveals rental income, it might be worthwhile to drop by the property. Ditto when there’s partnership or S corporation income—track down the outfit in question and ascertain whether it continues to generate income for the dear ex-spouse in question.

About the author:

Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from “Julian Block’s Year Round Tax Strategies,” available at julianblocktaxexpert.com.

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