Finding Hidden Income and Assets With a Tax Return

One of the most common financial documents reviewed in a divorce or child support case is the income tax return. Tax returns don’t seem all that exciting, and appear to just be a record of what was earned by a party. But a personal income tax return can be an excellent starting point for identifying hidden income and expenses.

Certain income and expense items will be reported to the Internal Revenue Service, and therefore must be included on an individual’s tax return. Income and expenses reported on a tax return should be traced back to the underlying assets. In some cases, the assets uncovered are also sources of income that may have been hidden, including things like rental properties, investments, or business ventures.

The following are items on a personal federal income tax return, along with the assets which might exist based on the data on the tax returns.

  • Interest – May indicate the existence of bank accounts, certificates of deposits, bonds, investment accounts, or loans receivable.
  • Dividends – Indicates the existence of bank accounts, investment accounts, stocks, or other investments in business entities.
  • Business Income or Loss – Signifies sole proprietorships or other sources of income, such as royalties.
  • Capital Gain or Loss – May point to investment accounts, stocks, business interests, or other investments.
  • IRA Distributions, Pensions, Annuities – Points to the existence of retirement accounts, annuities, or other valuable retirement assets.
  • Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts – Indicates the existence of income-producing assets (real estate or business) or an interest in estates or trusts.
  • Farm Income – Points to farming activities, including valuable assets such as real estate and livestock.
  • Health Savings Account Deduction – Signifies the existence of a medical-related savings account.
  • SEP, SIMPLE, Qualified Plans – Indicates retirement accounts for self-employed individuals.
  • IRA deduction – May also signify the existence of retirement accounts.
  • Foreign tax credit – This signifies investment accounts with foreign holdings, or investments in foreign countries.
  • Income Tax Withheld and Estimated Tax Payments – These items should be evaluated to determine whether excessive amounts are being withheld or paid as a method of hiding assets.
  • Penalty on Early Withdrawal of Savings – The disposition of the withdrawn funds should be investigated.

The following items on Schedule A of the personal income tax return may also indicate the existence of assets.

  • General Sales Taxes – This could point to the purchase of substantial assets.
  • Real Estate Taxes – May indicate the existence of real estate.
  • Personal property taxes – Could point to the existence of an automobile.
  • Home Mortgage Interest – May also indicate the existence of real estate.
  • Mortgage Insurance Premiums – Points to real estate.
  • Investment Interest Paid – Can indicate the existence of investment accounts.
  • Other Expenses (Investment, Safe Deposit Box, etc.) – This may point to investment accounts, safe deposit boxes at banks, or the like.

It pays to dig into the details behind the income tax return if there are suspicions of hidden assets or sources of income.

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