Julian Block is back again. In this piece he explains how an individual tax return can be used to help uncover assets in a divorce. I have a bit of experience doing litigation support in divorces, so I have interspersed a few comments. Some of Julian’s language is a bit on the “retro” side – (e.g. “hubby”, “private eye”). I probably don’t need to point out that the asset hiding and hunting genders could be reversed or that a married couple can be of the same gender, but I am not about to impose gender neutrality on my guest posters.
Using tax returns to unearth hubby’s hidden assets”
Divorces can be costly, from paying fees for lawyers or expert witnesses to appraisals of homes, businesses or other assets. The expenses soar when couples take their conflicts to the courts. And sometimes there’s an added expense—finding hubby’s hidden property. Consider what happens when wives hire private investigators to track down assets concealed by future ex-husbands. Fees to find those hidden assets can add up to many thousands of dollars, as I can confirm from my work as a tax lawyer and investigator.
One of my more memorable clients was a woman whose divorce proceedings had become horrendously prolonged and contentious. A dozen or so years ago, she shelled out $15,000 just to have a private eye tail her spouse, a medical professional and a serial philanderer. The sleuth discovered a safe deposit box rented by the husband in his aunt’s name and crammed with nearly half a million in greenbacks. That $15,000 proved to be savvy spending; unearthing the concealed cash compelled the husband to increase the wife’s divorce settlement. Wisely, he wanted to avoid court testimony about cash payments from patients—information about income unreported on tax returns that the judge might routinely have passed on to the IRS.
There was no deduction for the $15,000. Generally, the cost of a divorce is nondeductible. There’s a limited exception for the part of the expenses specifically allocable to tax advice in connection with a divorce, as well as for legal fees to obtain taxable alimony.
Not all searches for hidden assets are that dramatic—or expensive. Fortunately, there’s a no- or low-cost source of information for spouses who are compelled to litigate their divorces or for already-divorced spouses who seek to recover overdue payments of alimony or child support. And frequently the means for unearthing this information is tucked away in their file cabinets—unbeknownst to those seeking the information. This is because still-marrieds and ex-spouses can glean a good part of what they need from the separate schedules submitted with their jointly filed federal tax returns.
Indeed, a treasure trove of names and amounts that could considerably shorten searches for hidden assets can be found in the 1040 forms, as follows.
1. Check Schedule B:This schedule requires listing the names of mutual funds, brokerage companies, banks and other sources of dividends and interest. At the bottom of Schedule B are questions about the existence of banks and financial accounts in foreign countries or foreign trust transactions. Not everyone will have a Schedule B, however. For those whose interest or dividend income is less than $1,500, the totals for dividend and interest income are listed on the first page of Form 1040. Taxpayers with bank or other financial accounts in foreign countries and those involved in certain foreign trusts have to continue filing Schedule B, regardless of the level of dividends or interest income.
If the dividend and interest amounts aren’t listed on a Schedule B, this can make it harder to find out where the investments or bank accounts are. But just listing totals of interest and dividend income reveals that an ex-husband owns assets that generate interest and dividends, at least during the year covered by the return. This, in turn, gives the spouse endeavoring to find hidden assets a starting point for her quest.
2. Check the Schedule D:
This schedule discloses capital gains and losses from sales of fund shares, individual stocks and other assets. In other words, if the husband has listed profits from a stock sale, that establishes that he has owned—and unloaded—that stock. Chances are he owns more.
3. Check the Schedule E
This schedule discloses income or loss from the following sources: rental real estate (including the type and location) and royalties; partnerships and S corporations (S corporations are companies—taxed much the same way as partnerships are—that pass profits or losses through to their shareholders, who pay taxes at their own individual rates); and estates and trusts.
So if Schedule E reveals rental income, it might be worthwhile to drop by the property. Ditto when there’s partnership or S corporation income—track down the outfit in question and ascertain whether it continues to generate income for the dear ex-spouse in question.
Other Issues
But enough about IRS-mandated paperwork and back to wives and the husbands to whom they are either no longer married or soon to be no longer married. Here’s a typical scenario in my office: a client discloses that she foolishly signed a blank 1040 when tax time rolled around each April. And this was the last time she saw or thought about her joint tax returns. When she became aware of the need for information about her husband’s finances, he refused to give her copies of the filed returns.
True, exes and soon-to-be exes can ask a tax professional to get the copies for them, but the hourly fees to accomplish that task might total into the hundreds of dollars, money that would probably be unnecessarily spent. Securing the copies is one chore the wife can readily handle without the need for paid assistance from a tax pro or anyone else.
If the couple paid someone to complete their returns, like an accountant, the easiest way for her to get copies is to contact the preparer. The law, in most cases, requires a paid preparer to keep copies of returns for at least three years after the filing due date—for instance, at least until April, 2016, for a return for tax year 2012, with a filing due date, for most persons, of mid-April, 2013. The preparer is supposed to provide copies to any of the signers.
Checking with the preparer first can save both time and money, notes the IRS, since it imposes a charge of $57 for each return requested. But some preparers, having dealt with the other spouse and wanting to preserve their relationship with him, might be recalcitrant and take their time turning over the paperwork. And what if there was no preparer or the returns can’t be obtained from that person? Then the wife can contact the IRS for copies. She’s entitled to them even if all the jointly reported income was her husband’s.
The IRS requires a bit of easy-to-complete paperwork when it is asked to provide copies of 1040s and all attachments, including W-2 forms that disclose salaries and contributions to 401(k)s or other kinds of retirement plans. The wife simply signs and submits IRS Form 4506 (Request for Copy of Tax Form). To ease her burden, it needn’t be signed by her husband. She should allow at least 60 days for processing the request.
Form 4506 cautions that the IRS doesn’t keep returns indefinitely. Its usual practice is to hang on to 1040s for no more than seven years. Copies of Form 4506 are available by downloading from the IRS’s website, irs.gov.
With a little digging and a little paperwork, sometimes those hidden assets can come to light. _______________________________________________________________________
Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as: “a leading tax professional” (New York Times); ”an accomplished writer on taxes” (Wall Street Journal); and “an authority on tax planning” (Financial Planning Magazine). Information about his books is at julianblocktaxexpert.com.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com on June 30th, 2012