Evaluating Business Tax Returns in Divorce Cases

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Tax returns can be one of the most important pieces of information a forensic accountant evaluates in a divorce case. Of course, there are other very important financial documents, but income tax returns provide summary information about of lot of financial issues, including income, expenses, and assets. I typically recommend reviewing three to five years of tax returns, but the further you can go back, the better the picture you will get of the personal or business finances.

If a party claims that personal or business tax returns are unavailable for any reason, consider requesting the records directly from the Internal Revenue Service. This requires the consent of an individual or business owner, and can be done with Form 4506, Request for Copy of Tax Return.

On the business side, it will be important to compare the financial statements with the income tax returns. Because of differences in accounting rules and the tax law, numbers for the same period may differ between the financial statements and tax returns. Depreciation is one example of a line item that typically differs between the financial statements and income tax returns. The expert should investigate any differences between the financial statements and tax returns, and refer to the tax laws to confirm whether such a difference is legitimate.

Some of the key information that may be found in the income tax returns includes: Continue reading

Using Income Tax Data in Family Law Cases

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Income tax returns and supporting information such as W-2s and pay stubs are the most common and basic documents which evidence income in family law cases. This article discusses the sources of income that are disclosed on a personal income tax return (Form 1040), and some ways the items can be evaluated to search for hidden income and hidden assets.

  • Wages – The figures reported on the income tax return should be matched to the W-2. The W-2 and the pay stubs will provide additional information on the employers, pay rates, total pay, certain benefits, and taxes withheld. Additional analysis may include tracing bank deposits to ensure that all wages were used for the benefit of the family.
  • Taxable Interest and Tax Exempt Interest – These items of income must be considered when calculating income available for support. They are also important because they can point to bank, investment, and brokerage accounts that may not have been specifically disclosed in the family law case.

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Big Name Tax Prep Services Are a Waste of Money

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You need your personal taxes done and they’re not that complex, so you think you’ll just run right over to H&R Block, Jackson Hewitt, Liberty Tax Service, or some other tax preparation franchise. It’s easy and they must be good or they wouldn’t have so many locations and be in business so long, right?

Wrong. The fact of the matter is that you’re taking a big risk if you have your taxes done at one of the large tax return sweatshops or a similar smaller service. These companies have a few major drawbacks that most consumers are unaware of:

The prices they charge are generally too high. Even the simplest of tax returns can cost you well over $100, and that type of fee is just too much. Add in some things like a rental property or an in-home business, and watch your tab for the tax return run up fast.

The name of the game at the tax return franchises is turning out as many tax returns as fast as they can, at the lowest possible cost. This means that most of the employees are inexperienced data entry clerks who really know next to nothing about the tax law. They couldn’t spot an opportunity or a problem with your tax situation if their life depended on it. Do you really want to risk having your taxes prepared by someone who took a day-long class to learn how to enter data into a computer program?

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Unreported Income: Bank Deposits Method

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When the Internal Revenue Services suspects that a taxpayer has unreported income, the agents can use one of several methods to uncover that income. These methods can also be used to help calculate hidden income in a divorce or child support case. One such method used to determine unreported income is the bank deposits method, in which the forensic accountant analyzes bank deposits. In the video below, Tracy explains how this is done.

Using the IRS Expenditures Method to Determine Income

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When the IRS believes a taxpayer has unreported income, they will use alternative methods to attempt to determine the true income. One of those methods is the Expenditures Method. Tracy Coenen explains the basic methodology in this video. Note that this method of calculating income can be used in a variety of cases that involve allegations of hidden income including divorce, money laundering, and income tax fraud.

Defending Tax Fraud Cases – Expert Financial Analysis Required

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Written by Tracy L. Coenen, CPA, CFF

White collar government investigations almost always have one thing in common: They rely heavily on an analysis of financial information. This often includes going through banking documents with a fine tooth comb, and can also involve scrutinizing accounting records.

While the task of accumulating this data and examining it seems basic, there is much work involved, and expertise in financial and accounting crimes is necessary to fully understand the issues and the potential criminal or civil charges that the government brings against the company or individual. To properly defend such a case, it is necessary to have a financial investigator involved to help filter the data and the issues the government will raise. Continue reading

Surviving an Income Tax Audit

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Income tax audits are intimidating whether you are being audited personally or as a business owner. There is a right way and a wrong way to handle an audit by a state or federal taxing authority. It is easy to dig a hole for yourself, but awfully hard to get out of that hole.

Whether you attempt to handle an audit on your own, or opt to involve a professional who is experienced in these matters, there are some things you should know as you embark on your journey. I don’t ever suggest that a taxpayer submit to an audit alone. It is very helpful to have an experienced professional along for the ride. Not only can the accountant or attorney help you complete records requests, she or he can also act as a buffer between the taxpayer and the IRS.

The process of an audit is often one big negotiation. It is a give and take between both sides. Ultimately, both sides want the case closed, and the faster we can get to that point, the better. (Preferably with the least amount of pain for everyone involved.) Continue reading