How Can a Divorcing Spouse (and the IRS) Identify my Undisclosed Assets / Income?

It is probably not an uncommon occurrence for divorcing spouses to at least consider concealing assets or income to secure a better outcome in the divorce settlement. Whether wealthy or middle class, many people are tempted to extend extraordinary efforts or measures to maximize their share of the marital assets and minimize support obligations (spousal and child support). In other instances, the spouse who handled the financial affairs may have set up secret offshore accounts, trusts, or other entities as part of an asset protection program. He or she may have been instructed by the so-called asset protection company to always keep the account secret.

Unfortunately, in many cases, these efforts cross the line from a zealous protection of assets to criminal conduct. Charges and penalties may include tax evasion, money laundering, FBAR penalties, FATCA penalties, and filing false tax returns. Furthermore, a divorcing spouse and investigating IRS agents who may suspect related tax fraud have a multitude of tools to detect the potential fraud and concealed assets.

Undisclosed Assets Schemes Often Follow a Pattern and Common Signs of Fraud

In some instances, asset concealment and tax fraud follows a similar fact pattern. The husband and wife have lived a lifestyle that is far in excess of what their stated income should be able to support. They may purchase luxury items such as cars, planes, boats, jewelry and other extravagant items. If the lifestyle lived by the couple is above the standard of living that is reasonably possible based on their history of reported income, it is highly likely that a court will be receptive to allegations concerning the concealment of assets or income.

In other cases, the divorcing spouse’s attorney or an IRS auditor may look for certain signs of fraud. The greater the number of signs of fraud that are present, the more likely it is that there is at least some impropriety in the party’s finances. These common financial fraud and asset concealment warning signs include:

  • Drastic levels of changes in the level of communication and confidentiality between the husband and wife heading into a divorce.
  • The longer the duration of time the spouse has perpetrated a fraud, the easier it is for the spouse to continue the fraud and conceal the fraud.
  • Mail is being rerouted from the home to an office or a secret mailbox.
  • There have been unexplained changes in behavior, addiction issues, or a spouse has connected with a new love interest.
  • The spouse is secretive about computer usage and may shield the screen.
  • Undisclosed “loans” to trusted third parties.
  • A sudden decline in income occurring simultaneously with the onset of marital difficulties.
  • Intentional frustration of inquiries and discovery requests.
  • Buying and storing of gold, art, antiques, and other valuable items.
  • Unusual cash withdrawals.

How Can the Former Spouse or IRS Discover Hidden Assets or Income Once They Suspect Concealment?

If the attorney for the divorcing spouse or an IRS agent suspects secret accounts / assets or hidden income, he or she is likely to engage in an array of discovery requests and other methods to discover the location of the assets or existence of the hidden income streams. He or she may hire a forensic accountant who is likely to assess the likelihood of the most common types of asset / income concealment including:

  • Customer account receivable payments are diverted to a related entity
  • Inventory is sold to a related party at a non-arm’s length discount
  • Cash sales are not recorded to the books nor deposited to the bank
  • Company pays the owner’s personnel expenses
  • Undisclosed business interests
  • Undisclosed foreign accounts and assets

He or she is also likely to assess whether you have any sources of income that are frequently overlooked in divorce proceedings. This may include tax-fee dividends, trust distributions, veterans’ or military benefits, and commissions and bonuses. The analysis is also likely to include a thorough review of 1040 Schedule D filings for hidden assets such as an unreported brokerage account or other assets. Last, a thorough analysis of any and all business income or ownership compensation will likely be conducted.

In the case of potential asset concealment matters that attract the attention of the IRS and Department of Justice, additional tools are available. Agents and investigators are likely to utilize the international account information collected through FATCA’s international governmental agreements, the Swiss Bank Program, and other enforcement efforts. Simply put, if you attract government attention, the IRS and DOJ have significant resources available to identify instances of asset or income concealment and the associated tax and foreign / domestic information reporting fraud.

What Can I Do if I Have Concealed Assets and Hidden Income or Have a History of Undiscovered Tax Fraud and I am Facing a Divorce?

The steps most likely to result in a favorable resolution of these circumstances will differ based on the particularized facts and circumstances present. An experienced criminal defense tax attorney can assess these circumstances and provide advice regarding a potential voluntary disclosure or other options.

However, having concealed assets / income and facing a divorce is a potentially significant risk that must be managed if you don’t want to have a divorce task issue . In some instances, a threatened disclosure of concealed assets / assets to gain leverage during a divorce may create criminal tax consequences. Furthermore, the risk of disclosing potentially criminal actions during a public divorce proceeding must also be carefully managed.