Calculating Income in Family Law Cases

forensic-accountingThis article was originally printed in the ABA Section of Family Law eNewsletter, October 2013.

There are four widely recognized methods of calculating income in family law cases. These four methods have been developed for use by the Internal Revenue Service in calculating unreported income in tax cases, and are the primary ways a lifestyle analysis can be completed.

Specific Items Method
One of the most straightforward ways to complete a lifestyle analysis is through an analysis of specific items of income. This method is possible when there are substantial documents detailing cash inflows, and is considered a “direct method” of verifying income.

Income-related information is gathered from bank and brokerage statements, tax-related documents, and business records. Inflows are identified and summed, theoretically verifying the income disclosed in the family law case. This method is easy to understand and present, which makes it an attractive option for evaluating claimed income. The court will easily be able to understand how income was calculated.

Scott London’s Other Crime: Tax Fraud

Former KPMG audit Partner Scott I. London brought great shame to the accounting profession this week by being charged with conspiracy to commit securities fraud through insider trading. After nearly 30 years with KPMG, London went down in flames after being caught passing insider information on audit clients of the Los Angeles office to his “friend,” Bryan Shaw.

Proving once again that there is no honor among thieves, Shaw got caught first, and then sold out his friend Scott to the Feds.  He helped them get a gorgeous trail of evidence, including phone calls and photographs of the crime.  Both are now charged with insider trading.

Kwame Kilpatrick: Lifestyle Analysis in Criminal Cases

kwame-kilpatrick-white-collar-crimeIn 2008, former Detroit Mayor Kwame Kilpatrick was charged in state court with 8 felonies related to perjury, misconduct in office, and obstruction of justice. In On September 2008,he pleaded guilty to two felonies for obstruction of justice and was sentenced to four months in the Wayne County Jail and ordered to pay $1 million of restitution to the city of Detroit.

The fun didn’t stop there. Kilpatrick has been accused of hiding money that could be used to pay $855,000 restitution owed to the city of Detroit, stemming from the conviction. Despite claiming poverty and an inability to pay the restitution he owes, money has been magically appearing! Money was transferred to his wife, and Kwame  himself received $4,000 from a mystery source. None of these funds were disclosed to the state by Kilpatrick, despite being required to do so under the conditions of his probation. It is suspected that Kilpatrick has money hidden, and that is the source of the funds.

Tax Fraud and Family Law

If you’re a family law attorney practicing in Wisconsin, you might want to consider attending a State Bar of Wisconsin CLE seminar being presented by Gregg Herman and Al Dassow on January 11, 2013. They’re talking about Tax and Tax Fraud Issues in Family Law.

Gregg Herman has been practicing family law since I was a little kid (he’s going to hate me for saying that), and I’m fortunate to run into him in my office building from time to time. He has blogs on family law issues, and I urge you to take a peek at his blog and put it into your RSS reader so you can keep up with it. He has been blogging faithfully for the better part of a year (no small feat!) and I am looking forward to reading more.

Do Former Law Enforcement Officers Make Better Forensic Accountants?

Today Brian Willingham of the Diligentia Group has inspired me with his article Do Former Law Enforcement Officers Make Better Private Investigators? While Brian agrees that experience in law enforcement can be helpful to a private investigator, it does not necessarily make that investigator better. The same can be said for forensic accountants and fraud investigators: Law enforcement experience can be helpful, but it is not as important as you might believe.

Brian points us to a video that suggests that:

Getting Business Tax Returns in a Divorce

When one or both spouses have an ownership interest in a business, it is critical to get both income tax returns and financial statements for the entity. It is impossible to fairly evaluate the business and the income from it without both of these.

Many times we meet resistance from the spouse during discovery. It is common to hear “we already gave you the financial statements, why do you need the tax returns too,” or vice versa. Both are important because they provide different information. Occasionally the two will have identical information, but the vast majority of the time there will be different numbers and different levels of detail. We want as much information as possible on the business, so both are critical.

Criminal Defense of Financial Cases

The most interesting cases I work are criminal cases for defendants accused of financial crimes such as money laundering, tax fraud, bribery and corruption, embezzlement, and investment fraud. I do my best work as a forensic accountant and fraud investigator in cases in which a trail of money must be followed through a complex web of people, entities, and bank accounts.

Peers and colleagues often question my desire to do criminal defense work. CPAs often see themselves as financial watchdogs, especially when they are providing traditional accounting or auditing services. The see themselves on the “right side” of the law, and can’t get their heads around the idea of a CPA helping a criminal.

Don’t Believe Tax Reduction Commercials

You hear the commercials on television and radio almost daily: We can reduce your tax debt to pennies on the dollar.  The charlatans claim they can help get rid of your IRS debt and state income tax debt. Who they’re really helping is themselves…. to your wallet.

Probably the most well-known tax debt reduction professional was Roni Deutch, known as “The Tax Lady.”  Her firm purported to provide help to clients with Offer in Compromise needs, IRS installment agreements and Currently Not Collectible tax accounts. Unfortunately, it appears Roni took a lot of money from people and provided them little or no help in return.

Captive Insurance Plans: The Dangers of Being “Listed”

Guest post by Lance Wallach

Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble. In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as “listed transactions.”

These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate.  Section 6707A of the Code imposes severe penalties ($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction.

IRS Overwhelmed By New Tax Law Changes

Guest Post by Brian Mahany

Each year, the Treasury Department Inspector General for Tax Administration (”TIGTA”) audits the IRS to measure the agency’s performance. 2010 was not a great year for the Service or taxpayers.  The Inspector General concluded that,  ”During FY 2010, the IRS encountered many challenges, including a variety of tax provisions that were created, extended, or expanded.” There were over 100 new provisions alone just from the American Recovery and Reinvestment Act and the Patient Protection and Affordable Care Act.

To ease the burden of coming up to speed on these new laws, the IRS hired over 3000 new revenue agents, tax compliance officers and other personnel. Unfortunately, the private sector doesn’t have those same resources.

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