The community property laws that apply in California divorce proceedings generally mean that both spouses have an equal share in any businesses built during the marriage. This applies even if only one of the spouses actively worked in the business. Sometimes, a spouse will feel that this is unfair, and will attempt to hide assets or profits from a business so they are not included when drawing up a pending divorce settlement.
There are professionals, however, whose job is to uncover hidden assets. They are often used by the IRS and may be hired by a spouse in a divorce where the couple has a business or considerable assets. These forensic accountants are trained to look for clues or ‘foot-prints’ that indicate that one of the spouses is attempting to hide personal or business assets. Often, when funds are being diverted from business or personal records, they are also not being reported on income tax records; so the person is frequently also guilty of tax evasion. One such professional stated that he always reviews records with the spouse of the person under investigation because ‘an estranged husband or wife will tell all.’ This is especially true of spouses who try to hide income by disguising it as business expenses or costs.
One obvious sign that judges and attorneys who frequently draw up divorce settlements are trained to look for is a change in the business’s profit and loss history. If the business begins losing money at approximately the same time that the couple began discussing divorce proceedings, they look at this as a red flag. Another hint is if the person has hired separate accountants for business and personal accounts. Large business investments or expenses while the company is showing a loss are also suspect.
It is imperative that the financial records submitted to the court in a divorce proceeding be as complete and accurate as possible. It is very helpful for those considering a divorce to be familiar with California’s laws regarding property division and divorce settlement so that they can have the necessary financial records available. Divorcing spouses do well to be as forthcoming as possible when reporting their income and assets because hidden assets uncovered by an IRS audit or a forensic accountant could end up costing much more in the long run.
Source: Bloomberg.com, “Hunting for Hidden Cash In Divorce Proceedings,” Ben Steverman, June 3, 2013