Los Angeles Divorce Attorney
Property Division in California


HOW TO FIND HIDDEN ASSETS?


The divorce process is a time of mistrust for each spouse, and right or wrong, each may accuse the
other of hiding assets.

Assets are traditionally hidden in one of four ways:

  •        The person denies the existence of an asset
  •        Assets are transferred to a third party
  •        The person claims the asset was lost or dissipated
  •        Creation of false debt.

Tax returns are the first place to look to discover hidden assets. It is a good idea to look at tax returns
for the past five years. By reviewing the tax returns you may discover assets that you had no
knowledge of or that were not disclosed by your spouse. The first two pages of a tax return can serve
as a “table of contents,” because they list the forms and schedules that are attached to the return.

Important forms to review include:
  •        Schedule A – Itemized Deductions. May help identify unlisted assets or sources of income.
    For example property taxes may reveal real property or a boat that one spouse does not know
    exists; and gambling losses would reveal that there are gambling winnings.

  •        Schedule B – Interest and Ordinary Dividends.
    This identifies the assets and investments generating interest and dividends. However some        
    interest generating accounts may be non-taxable and may not be listed.

  •        Schedule C – Profit of Loss From Business.
    This form may be a place to hide assets or income. For example, depreciation for real estate is
    generally not a cash outflow and it is added back to net income to determine the actual income.
    The depreciation schedule may also reveal additional assets in the business.

  •        Schedule D – Capital Gains and Losses. This form is used to reports gains and losses
    from stocks, bonds, and real estate.

  •        Schedule E – Supplemental Income and Loss. This form is used to report income from
    rental properties, royalties and partnership and s-corporation income. Depreciation should be
examined to determine whether this is an expense that should be added back to income.

  •        Form 1065 is used to report partnership income

  •        Form 1120 and 1120S are used to report corporate income

  •        Form 2441 claims child-care expenses

Both federal and state income tax returns, 1099s and W2s, as well as amended returns need to be
reviewed.

In the course of discovery (sharing documents and financial information with the opposing side), most
spouses believe that their counterpart has somehow hidden or failed to disclose the existence of
certain assets. The following checklist of research items may assist in determining the whereabouts of
hidden assets or if, in fact, they exist at all:

1.        
Financial Statements – Any loans from lending institutions require sworn financial statements
to be filled out. In most cases, the borrower is trying to impress the lending institution with the extent of
assets and may exaggerate these. Looking back five years or so at these statements may put you on
the trail of assets which are now unaccounted for, or which show valuations substantially greater than
what is now claimed.

2.        
Personal Income Tax Returns – A review of personal Federal and State income tax returns
and attached schedules filed during the past five years may indicate sources of interest or dividends.
The returns may also reveal unknown sources of income or loss from trusts, partnerships, or real
estate holdings. You should also review W2’s, 1099’s, 1098’s and K1’s.

3.        
Corporate Income Tax Returns – If one spouse is the principal owner of a closely held
corporation the corporate tax returns should be reviewed for the following:
    a.        He or she may be manipulating his or her salary by taking less pay and then taking loans
    from the corporation to make up the shortage
    b.        He or she may be charging personal expenses to corporate accounts, which will later be
    reimbursed or charged to the officer’s loan account.
    c.        Corporate returns should also be reviewed for excessive or unnecessary retained
    earnings (undistributed profits). These may be disguise available profit distributions or an
    artificially low salary level.
    d.        Reimbursement of prior capital contributions or repayments of loans to the corporation
    may also provide hidden cash flow to your spouse.

4.        Partnership Income Tax Returns - Reviewing several years of partnership income tax returns
(IRS Form 1065) may reveal sudden changes in the partnership interest or distributions. Such changes
often occur at the time of a divorce and then compensating adjustments are made after the divorce is
completed.

5.        
Canceled Checks and Check Registers from Personal, Partnership, and Corporate
Accounts -
 While time-consuming, it is always revealing to go over all the canceled checks and bank
statements from personal accounts for the past few years, and post the expenditures to different
columns under utilities, entertainment, loan payments, and so on. You will learn the amount of total
expenditures per year, which sometimes exceeds income, and you will have a better feeling for cost of
living and where budget cuts should be made. In terms of hidden assets, you may come across
canceled checks for the purchase of property, which you never knew, existed. It is important to check
off the canceled checks against the appropriate bank statement to make sure that you have all of the
canceled checks. It is possible that certain checks were removed before they were delivered to you.
For larger amounts deposits and withdrawals you should review the back and the front of the checks.

6.        
Savings Account Passbooks - Acquire the passbooks for any savings accounts open during
the past five years or more. Look for any deposits or withdrawals that are unusual in amount, or in
pattern. A monthly withdrawal or deposit of money in the same odd amount may reflect mortgage
payments or income receipts from sources that you are not aware of.

7.        
Security or Commodity Account Statements - If one spouse has been buying and selling
stocks or bonds or dealing in commodities, the broker with whom he or she trades furnishes monthly or
quarterly statements indicating all transactions. A review of these statements going back a few years
could reveal the existence of securities of which there was no knowledge or could raise questions as to
the disposition of the sale proceeds. Cross checking securities transactions and bank accounts by
date and amount will usually verify the source or disposition of the monies involved. If the securities are
sold and the proceeds are unaccounted for, you can be sure the money is out there somewhere.

8.        
Expense Accounts - Very often, a corporate employer will allow employees a great deal of
leeway in their expense account reporting. A spouse may take advantage of this by exaggerating or
even falsifying business expenditures. The employer maintains records as to expense account
disbursements to the employee over the year with monthly detail. A check of these records will indicate
the extent to which the employee is able to “live off” the expense account.

9.        
Deffered Salary Increase, Uncollected Bonus, or Commissions - You should always
determine whether a salary increase is overdue, when it will be forthcoming, and how much it is.
Employers are sometimes sympathetic to their divorcing employees and willing to bend the rules
slightly to defer salary increases, bonuses, or commissions in order to suppress apparent income.
Ultimately, these increases, bonuses, or commissions must be paid to keep the corporate books
straight, and the employer will rarely lie when put under oath or forced to make a written statement on
the subject. Sympathy goes just so far.

10.        
Safe Deposit Box Activity - Banks maintains safe deposit box records indicating when and
who accessed the safe deposit box. These records will not indicate contents of a box or what, if
anything, has been removed. If the first spouse was aware of the contents at the point when the
records indicate the second spouse opened the box and something is now missing, he or she has a
pretty good idea of who took it. This information can be subpoenaed.

11.        
Cash Transactions and In Kind Compensation - One spouse may be a physician or a
shopkeeper, or in some other work where cash is paid, or he or she may receive in-kind compensation,
where something of value – other than cash – is given in exchange for services. Such cash payments
or non-cash items are rarely reported on the income-tax return, but if you know of such income in the
past and can subpoena current information, it will help in proving available income in excess of that
shown on the income-tax returns. If one spouse buys things of substantial value with cash, there is
probably a source of cash income somewhere. Most people do not retain cash in a non-interest
bearing form unless they are hiding the source of the cash.

12.        
Children’s Bank Accounts - Frequently, a spouse who wishes to hide money will open a
custodial account in the name of a child. Deposits and withdrawals are made without any intent that the
child has use of the account except in case of the spouse’s death. The interest from these accounts is
not shown on income-tax returns, nor are returns filed for the children.

13.        
Personal Knowledge of Spouse’s Habits - One of the most useful discovery tools is
personal knowledge of the spouse’s habits with money. People who are attempting to hide money very
seldom do so without making some form of written note so they can have a personal account of what
they have done. When things are going well in a marriage, the spouse may tell the other spouse about
such records, but you can be sure they will disappear in a case of divorce. The more secretive a
person is, the more detailed such notes are likely to be. If a spouse has neglected to declare income to
the IRS, the knowledge of hidden income or assets may prove to be a powerful leverage factor in
reaching a satisfactory settlement. Be careful you cannot threaten to turn someone in or threaten any
legal process to negotiate a better financial settlement that would be a criminal act – extortion.

14.        
Phony Income Tax Returns - When the divorce has been filed, some spouses are inclined to
alter the copies of their previously filed income tax returns to hide or adjust pertinent financial
information. It is always a good idea to ask for copies of jointly filed returns directly from the Internal
Revenue Service on
Form 4506-T.

15.        
Phony Loans or Debts - To keep cash from being divided, a spouse may sometimes attempt
to bury the money with a phony loan to a cooperative friend or relative. The loan may be tied up with a
long-term note or with a claimed likelihood of not being collectible so as to remove this money from
consideration at settlement time. The other spouse, who was never aware of the debt, of course did
not sign the note, because it probably came into existence after the divorce proceedings commenced.
Sudden payment of debts to out-of-state creditors who are not available for deposition is usually a sign
that the debt is a phony.

16.        
“Friends” or Other Phonies on the Payroll - If one spouse is in a position to control the
payroll of a sole proprietorship, partnership, or closely held corporation, he or she may be paying
salaries to a friend or relative who is not actually providing services commensurate with the
compensation. The friend on the payroll may be stashing the money away or they may both be
enjoying it. In either case, the profit of the enterprise will be reduced accordingly and your spouse may
be drawing a lesser salary. The same ploy can be used for payment to phony independent contractors.

17.        
Retirement Plan Abuse - If one spouse has established a pension or profit-sharing plan in
connection with a closely held corporation, the plan should be carefully reviewed to determine whether
monies that have been contributed to the account are being invested in accordance with the plan
requirements. Very often, deductions will be taken for contributions to such plans, and then the money
is used for personal living expenses or taken out as loans, which are never repaid.

18.        
Defined Benefit Pension Plans - Defined-benefit pension plans are distinguished from
defined-contribution plans by the fact that the benefits payable at retirement age are specified within
the plan itself rather than by some contribution formula. The amount of the benefits then must be
actuarially calculated, based on the age of the intended beneficiary and the point at which benefits are
to be paid. A great deal of income can be buried by substantial payments into such a plan during the
years preceding or during divorce litigation. The required payments could be a substantial part of the
employee-spouse’s income, if that is what is required to achieve the defined goal at retirement. This, of
course, leaves little money available for support or division as marital property. Once the divorce is
completed, the defined-benefit plan can be discarded, even though a substantial tax loss may result.

19.        
Estate, Gift and Inheritance Tax Returns - Much useful information is available from
inheritance, estate, or gift-tax returns of relatives you believe have been generous to the spouse. If
these returns show that there were substantial gifts or bequests that have not been accounted for in
the settlement negotiations, you are alerted that other assets could also be hidden. A tracing will have
to be made from the estate’s distribution to see what has happened to the assets.


Contact a Los Angeles Divorce Attorney at Law Offices of Warren R. Shiell to discuss your
property division issues.
Call for a free consultation now 310.247.9913.


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