It’s everyone’s favorite or least favorite day of the year—tax day. While some people are rejoicing about their anticipated refund check, others are reluctantly handing money over to the government. Here, we’re thinking about the wealth of infor
mation tax returns hold and how we regularly use them in our asset searches.
We often blog about the situations in which tax returns would be helpful to identify hidden assets. For example, see our posts on finding royalties and tracking down trusts and pensions. At a certain point, we advise that you hire an investigator and/or forensic accountant to really dig down deep into potential hidden assets, but there is no reason you can’t do some preliminary research on your own by looking at tax returns.
What should you look for? For starters, make sure that the tax return you’re reviewing is actually the one that your debtor sent to the IRS. It’s possible that your debtor provided you with a doctored return to conceal assets from you. The best way to ensure you’re looking at the true return is to request it from the IRS. If you filed jointly with the debtor, you have to right to access this material. If you filed separately, you may have to wait until discovery. Request tax returns going back 5 years to get a fuller picture of your debtor’s finances.
Take a close look at information about your debtor’s wages on both the 1040 and any attached W-2s. Does it match up with the information he’s provided you on his statement of net worth? Does it look like there have been any unexplained significant changes year to year? You should also look for deferred compensation and unexercised options to see what kind of income may come in the future.
Review any retirement account distributions on the 1040 (lines 15a and 16a). Did your debtor take any significant distributions from his retirement accounts in any given year, perhaps in order to appear to have less money set aside for retirement?
To see if your debtor has any foreign investments, check 1040 line 47 in addition to Form 1116 (Foreign Tax Credit) and Form 8938 (Statement of Specified Foreign Financial Assets).
There is certainly more information you can gather by looking at tax returns, but these are some basic check points to get started. Tax returns aren’t 100% trustworthy. People do lie. However, it seems that most people are sufficiently deterred from doing so by the harsh penalties that await tax evaders. As a result, tax returns can uncover much unknown information about your debtor’s finances.