Hiring A Forensic Accountant For Divorce
The five reasons to get a professional on your team
|Written by Tom Yeung, CFA | CDFA|
Investment Advisor & Fund Manager, Jurnex Financial Advisors
Divorce is rarely easy for either party. Even when both sides agree to act amicably, separations can still cause situations conducive to financial fraud. That’s why many couples need to use a forensic accountant for divorce.
When it comes to choosing a forensic accounting for divorce, couples should reach out to a qualified expert as soon as possible. That’s because the earlier you start, the better chance you have of reaching a reasonable and equitable settlement. But even those who are later in the process can benefit greatly.
What is a forensic accountant for divorce?
A forensic accountant is a professional who specializes in tracking, valuing, and finding assets. These experts are trained in detecting financial fraud and have the tools to make sure both parties are honestly reporting their assets.
- Tracking assets: bookkeeping and general accounting services to ensure assets don’t “disappear” during a divorce.
- Valuing assets: understanding what each piece of marital asset is worth and their tax consequences.
- Finding hidden assets: If one side decides to hide marital assets for themselves, not only will the other party get less in divorce, but they may still be liable for taxes and penalties on the hidden assets.
So what are the five reasons you need a forensic accountant for divorce?
1. Account for spending after divorce
The average American divorce takes between 8 to 14 months to finalize. During that time, both parties usually have shared expenses, such as housing and childcare expenses. However, most couples generally choose to keep independent accounts at the moment they announce their separation. Doing so protects individuals from a spouse who later goes on spending or gambling sprees.
However, keeping two sets of accounts for shared and separate spending can be a challenge. That’s where a forensic accountant for divorce can play a substantial role: in differentiating between shared and independent expenditures.
- Marital property. Assets generated DURING marriage. These assets are split equally (or equitably) between spouses.
- Separate property. Assets received BEFORE marriage, or gifted DURING marriage to one spouse. These assets remain the spouse’s individual property after divorce.
2. Create a fair division of assets
All 50 US states require marital assets get divided fairly between separating spouses. But what does “fair” mean? Only in 9 community property states does fair mean an equal 50-50 split. The other 41 states divide assets “equitably.” In other words, it’s up to the parties or the courts to decide what constitutes as fair.
Often, couples will do “like-for-like” exchanges among assets with similar value. For instance, one spouse might want to keep the house, while the other spouse maintains their pension fund.
A forensic accountant can help create a fair division of assets. Read more about Equitable Distribution.
- Property value. A forensic accountant can value assets for separating couples. They can also help keep track of changing asset values over time.
- Tax considerations. Marital assets might have very different tax consequences. For example, $100,000 in a tax-free IRA is worth far more than $100,000 of fully-taxable stock options.
- Pensions, annuities, and retirement accounts. Forensic accountants can help value and divide retirement benefits. Usually, dividing assets requires a court-signed order that an accountant can draft.
3. Valuing marital assets
For couples with more complicated assets, a forensic accountant for divorce can help assess and monitor property prices.
- Tangible property. Includes any movable property, such as vehicles, furniture, and any collectible items. These can also involve gold bullion, artwork, and wine collections.
- Real estate. Appraising value for primary homes an investment properties. Forensic accountants will also help identify the tax basis of the property and note any depreciation taken. The number of deductions taken will affect its final sale value.
- Stocks and stock options. Investment accounts and company stock options can be a significant source of family wealth. A forensic accountant for divorce will help track the value of the stocks during a divorce, as well as the value of non-vested stock options.
- Closely-held businesses. Any sole proprietorships, partnerships, LLCs, S-Corps, and family companies require additional scrutiny. That’s because it’s easy for business owners to minimize the value of their companies by hiding company assets.
- Pensions and annuities. For those enrolled in government or private pensions, the value of future benefits still counts towards marital assets. Many couples looking for a “clean break” in divorce will often assign a value to a pension or annuity to one spouse, and allow this other spouse to take additional marital assets.
Usually, couples prefer to value and divide assets immediately after divorce, rather than hold on to assets and eventually divide them later. That’s because divorcing couples can make use of the unlimited marital deduction for taxes before they separate. Also, many couples don’t want the additional headache of having to deal with their ex-spouse when deciding how to sell the marital property.
4. Find hidden marital assets
Divorce can often stir up feelings of resentment. These circumstances can incentivize divorcing couples to try concealing assets from the other side. Read more about Finding Hidden Assets.
If you suspect your spouse might try hiding marital assets, you must contact a forensic accountant for divorce as soon as possible. That’s because you want to find the missing assets before they disappear entirely or get spent by the other spouse.
There are specific ways for spouses to hide marital assets from each other.
- Foreign tax shelters. Wiring money abroad is one of the most common ways for spouses to hide assets. Financial reporting in overseas tax shelters tend to be more opaque, and it’s easy for assets to disappear once they leave the US.
- Double-invoicing. When one spouse pays twice for the same service. For example, one side might photocopy and alter an invoice for shared mortgage payments, and use the second invoice to deposit money into their account.
- Related-party transactions. For both business and non-business payments, you should view any deal with family members or other related parties with suspicion. That’s because the value of assets exchanged could get inflated or misrepresented by unscrupulous spouses.
- Withdrawing money into personal accounts. Often, one spouse can simply open an account in their name and transfer joint assets over.
Without proper oversight, unscrupulous spouses can simply make assets disappear from the marital pile, simply to reappear in their bank account after the divorce gets finalized. A forensic accountant for divorce can help deter such activity, and even find the missing assets if fraud does happen.
5. Protecting innocent spouses from the IRS
Unknown to many spouses, hidden assets can also have tax consequences to the innocent party. For example, if one spouse has significant unreported foreign assets, the IRS will penalize both parties if they filed together. And the penalties can be extreme.
Failure to report foreign assets carries a civil fine of $100,000 or 50% of account balances. Criminal penalties are $250,000 and 5 years of jail. Misreporting domestic assets or deductions can carry similarly hefty penalties from the IRS.
Fortunately, there are three pathways that forensic accountants can use to help innocent spouses from getting hit with IRS penalties for their spouse’s wrongdoings.
- Innocent spouse. For spouses that did not know, and had no reason to know, that there was an understatement of tax. For this to apply, the innocent spouse must have been COMPLETELY unaware of wrongdoing.
- Equitable relief. For spouses that DID know about tax understatement, but have exceptional circumstances where penalties are unwarranted. For example, spouses that faced domestic abuse, have poor mental/physical health, or have financial hardship can request relief from IRS penalties.
- Separation of liability. A clear division of joint burdens of tax liabilities. Any taxes accrued once divorce proceedings begin will be the burden of the responsible party.
The right forensic accountant can help your divorce stay transparent and
Where to find more resources
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