Here’s an ugly truth: about 40-50 percent of marriages in the United States will end in divorce, according to the American Psychological Association. And the divorce rate among those who remarry is even higher. Add to that a statistic from a 2016 National Endowment for Financial Educations survey that found two in five Americans who have combined their finances in a current/past relationship admit to committing financial infidelity against their partner.

The first step in completing a divorce is creating a complete financial picture of the individuals involved at the date of community termination. This includes compiling a list of all assets and liabilities included in the community. Many individuals may attempt to hide assets prior to and during a divorce to prevent the opposing spouse to receive the amount legally owed to them in the property distribution. An individual may also attempt to under-report his or her income, which may affect any alimony or child support obligations.

Some of the more common methods individuals use to hide community assets include

• • Delaying bonuses, promotions or raises until after filing for divorce. If the spouse can control the timing of their promotion or bonuses, or is close enough to their boss or supervisor to convince them to delay, then the spouse could attempt to do so until after the divorce is finalized.
  • Purchasing luxury or expensive items before filing for divorce and under-reporting the value of those items. When a spouse knows a divorce is looming, he or she may begin purchasing luxury or high-dollar items with community funds before filing. He or she may then under-report the value of those items during the divorce process and may then convert those items back to cash after the divorce is finalized.
  • Making unusual cash withdrawals before filing for divorce. If a spouse suspects divorce is possible, he or she may begin to make cash withdrawals or take “cash back” during purchases that are not ordinarily made and hide the cash from their spouse.
  • Selling high value items to acquaintances, usually at below market value. A spouse may sell community items to an acquaintance acting as a legitimate buyer with a plan to reverse the sale after the divorce is finalized.
  • Paying a phony debt to a friend. Repayments of a fictitious debt can appear to be legitimate expenses and the friend ultimately may return the funds after the divorce is finalized.

If the individual in question is a small business owner, there are additional items and schemes he or she can use to conceal assets and under-report income during a divorce. The most common include:

• • Paying fictitious employees, vendors or consultants. A spouse who is a small business owner can record payments to these individuals, which will decrease the profitability and cash balances.
  • Delaying revenue recognition until a period after the divorce is final. A spouse may delay billing and invoicing a customer until after the divorce is final to deny the opposing spouse access to that income.
  • Not recording cash sales. The most common scheme a small business owner will use to defraud their spouse of marital assets is not recording cash sales and concealing the funds received.

If you suspect a spouse involved in a divorce is not being honest and may be concealing or diverting marital assets to defraud the opposing spouse, there are some basic methods and procedures to help identify and prove financial infidelity:

• • Reviewing historical tax returns and applying some basic analysis is the best place to start. That includes:
    • • Comparing reported income over several years to determine any inconsistencies in the years closest to date of divorce filing.
      • Reviewing Schedule B to identify any undisclosed investment and interest-bearing cash accounts that were not disclosed.
      • Reviewing Schedule E, if included, to identify any undisclosed rental properties, K-1 income, estates, trusts or any other ownership in income-generating endeavors and investments.
  • Review activity on all disclosed checking, savings and investment accounts, including all cleared checks before and after filing for divorce.
    • • This can uncover undisclosed accounts if a spouse has transferred funds or deposited checks from the community account into an undisclosed account.
      • This could identify if a spouse is funneling funds to a family member or friend prior to filing for divorce with a plan to recoup those funds after the divorce is final.
      • Reviewing the canceled checks of a business account could uncover fictitious employees, vendors or consultants.
  • Review all loan applications prepared before filing of a divorce.
    • • Loan and mortgage applications usually include a list of assets and an estimate of their value.
      • They also include a current income amount. If this amount is drastically different from the income reported in other areas, those discrepancies should be further investigated.
  • Review public records at local tax assessor’s office.
    • • Reviewing public records could uncover undisclosed real estate owned by a spouse.

The schemes and analysis procedures discussed above are just a few of the basics to keep in mind when searching for undisclosed or hidden assets. In many instances, depending on the opposing spouse’s involvement and financial expertise, the schemes can become very elaborate and difficult to uncover.

If the basic analysis procedures above uncover a substantial amount of unexplained discrepancies, the services of a financial expert, and sometimes private investigator, may be needed to fully uncover the full depth of the schemes used to defraud a spouse of their rightful share of the marital assets accumulated during the marriage. Click here to see how our Divorce Litigation team can help you, or email us at communications@ericksenkrentel.com for more information.

About Ericksen Krentel

Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.

That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.

Learn more at www.ericksenkrentel.com.

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