A business owner first became suspicious when one of her managers bought an expensive boat that seemed beyond his pay grade. A closer look at the employee and his department revealed sloppy record keeping and financial discrepancies. Was he stealing from the company?
Forensic accountants can help answer such questions. One of the most effective techniques for finding hidden income sources or assets is lifestyle analysis. It involves developing a financial profile of the subject and then looking closely at any mismatches between known resources and lifestyle.
Developing a financial profile can be challenging because many people with unreported income receive it in cash. Forensic accountants use the following methods to uncover it:
Bank deposit. The expert reconstructs the subject’s income by analyzing bank deposits, canceled checks, and currency transactions, as well as accounts for cash payments from undeposited receipts and non-income cash sources (such as gifts and insurance proceeds).
Expenditure. Here, the expert analyzes the subject’s personal income sources and uses of cash during a given time period. If the person is spending more than he or she is taking in, the excess is likely unreported income.
Asset. This method assumes that unsubstantiated increases in a subject’s net worth reflect unreported income. To estimate net worth, an expert reviews bank and brokerage statements, real estate records, and loan and credit card applications.
Proving that a person has unreported income is one thing. Tracing that income to assets or accounts that can be used to support a legal claim or enforce a judgment is another story. To do this, forensic accountants may scrutinize the assets noted above, as well as:
- Insurance policies
- Court filings
- Employment applications
- Credit reports
- Tax returns
Tax returns can be particularly useful because people have strong incentives to prepare accurate returns. For example, they may fear being charged with tax evasion if they lie to the IRS. As a result, tax return entries often reveal clues about assets or income that someone is otherwise attempting to conceal. Another potentially fruitful strategy is to interview people with knowledge about the subject’s finances, such as accountants, real estate agents, and business partners.
Improve the odds
When someone is actively attempting to conceal income and assets, you need the expertise of a forensic accountant. Contact us to improve the odds of a satisfactory litigation result.