How To Find Hidden Assets by Looking at a Tax Return
One of the most contentious questions in any divorce case is this: “What is my spouse hiding?” Before you hire professionals, like a private investigator or forensic accountant, you can start by looking at your own financial documents.
The most effective way to start is by learning how to find hidden assets in your income tax returns.
In order for a divorce to be fair to both spouses, each spouse should feel like they have a complete financial picture of all marital assets. From there, they should feel like they’re negotiating in good faith to divide their marital property as part of the divorce process.
But divorce proceedings don’t always go smoothly. And a devious spouse can use many different ways to hide assets and take advantage. And in a household where one spouse handled all the financial assets, it’s especially easy to hide assets.
However, it’s amazing how much financial information you can find about those hidden assets by looking at a tax return.
How far back do I go to find hidden assets?
If you’re parting ways amicably, perhaps you only need to look at the previous year’s tax return. But if you see red flags, then you should go as far back as you can-at least the past 3 to 5 years’ of tax returns.
Just remember, you probably won’t find all the answers in your tax return. And you might be confused by what you do find.
But you can give your attorney or accountant a head start when it comes to figuring out what needs further research. And the more work you’re able to accomplish, the less you’ll have to pay someone else to do it.
In this article, we’ll break down a tax return by section. In each section of this article, you’ll find a list of supporting documentation to look for.
It won’t give you the complete answer. But you can use this as a guide to answer questions such as:
- Am I dealing with an uncooperative spouse?
- Do I really have copies of all financial records? If not, what document demands should my divorce lawyer make so I can get the financial statements I need?
- How long will the divorce settlement process take?
Understanding that, let’s take a look at your tax return can reveal, starting with the front page of your Form 1040.
How to Find Hidden Assets Using Form 1040
Filing Status, Deductions & Dependent Information
You should be reviewing this section each year for information accuracy.
The important takeaway is that your marital status on December 31 will determine your marital status for the entire year.
- If you get divorced on or before December 31st, the IRS considers you either single or head of household for the whole year.
- If your divorce is finalized on January 1 of the following year, the IRS considers you to have been married (either separately or jointly) for the entire prior year.
You should also review the dependent section. You’ll want to understand:
- Who is entitled to claim each credit (like the child tax credit)
- When you might no longer be eligible for a particular tax credit for a family member. For example, the child tax credit usually expires when a dependent child turns 17, not 18.
Lines 1 through 9 break down most of the sources of income. Below is a summary from each section so you can understand what is being reported to the IRS.
Line 1: Wages
This is a list of the documents you and your spouse should use to calculate wage or other earned income.
- All Form W-2s & Form 1099-MISC. W-2s are the annual statements from an employer to employees for wage and other income (commissions, bonuses, etc.). Form 1099-MISC is a similar form given to people who are considered ‘independent contractors.’
- Copies of pay stubs for the tax year.
- Copies of check deposits.
This is the list of questions you should be asking as you review the tax return.
- Does Line 1 add up to all the income in your W-2s and Form 1099s?
- Do the pay stubs add up to the totals in the W-2s & 1099s?
- Do the pay stubs add up to the payroll deposits in your checking account?
Stop here for the time being. These don’t need to be exact answers. However, your taxable income should roughly correspond to how much money is going into your joint bank account.
If there’s a big difference, then perhaps some money is going into a new bank account you DON’T know about. In that case, it’s worth looking a little more closely at the pay stub to see if there is an allotment directing money into a new account.
Look at the W-2
Pay particularly close attention to lines 12a-12d. These lines tell the IRS about various employer-sponsored retirement plans, life insurance policies, or secret accounts that you might not know about.
Below are a few of the most common codes you can look for in lines 12a-12d:
- C: taxable life insurance
- D: 401(k)
- E: 403(b)
- AA: Roth 401(k)
- BB: Roth 403(b)
- V: non-qualified ISOs (stock options)
- W: HSA
If you see any of these codes, you should know about the related account. If you don’t, then you definitely need to have an experienced divorce attorney look for more specific information.
Line 2: Interest
- End of year bank statements & investment statements (Form 1099-INT). Note: Sometimes financial institutions will issue a consolidated 1099. This might include income from:
- Does Line 2 add up to all the income in your Form 1099-INT?
- Does the amount of tax-exempt income (Line 2a) make sense, based on your 1099-INT?
- Do you have a Form 1099-INT for each bank account? (Note: if your account earned less than $10 in interest, your financial institution is not required to issue a 1099).
If these don’t match up, then perhaps there’s a hidden account you’re unaware of.
Line 3: Dividends
- End of year investment statements (Form 1099-DIV). Might be consolidated into a 1099 containing other investment income.
- Does Line 3 add up to all the income in your Form 1099-DIV?
- Is there a disparity between the qualified dividends (Line 3a) on your 1040 and on your Form 1099?
If these don’t match up, perhaps there’s an investment account you need to look into.
Line 4: IRA Distributions
- End of year retirement account statements (Form 1099-R).
- Does Line 4 add up to all the income in your Form 1099-R?
- Is there a disparity between the total IRA distributions (Line 4a), and taxable IRA distributions (Line 4b) on your 1040 and on your Form 1099?
- If there are distributions that came from your account, did you authorize them? A lot of times when opening an IRA, a spouse might authorize the other spouse to do business with the financial institution on their behalf.
- Is there a chance that you gave your spouse permission to conduct financial transactions on your behalf? If so, you need to ensure that your divorce attorney is aware of any withdrawals that you didn’t specifically make.
Each account owner should expect a 1099-R for each account in which they withdrew money. So if there was a withdrawal from a traditional IRA and a Roth IRA, that account owner could expect 2 1099 forms. And if each spouse did this, they would receive a total of 4 1099 forms.
If there was a Roth conversion, then the Roth IRA custodian would issue a Form 5498. This outlines how much money entered the Roth IRA. Knowing this is important in case your spouse is doing Roth conversions without your knowledge and trying to share the tax bill with you.
Line 5-Pensions & Annuities
- End of year statements (Form 1099-R)
- Are there annuities or pensions that you didn’t know about?
- Is there a rollover from the employer retirement plan into an IRA you don’t know about? If you see $0 on Line 5b, that might indicate a rollover.
- Was there a lump-sum distribution? Look the Form 1099-R. If the ‘Total distribution’ box (2b) is checked, this might indicate your spouse was looking to dump the entire amount into a custodial account you didn’t know about.
Line 6-Social Security Benefits
- Social Security statement (Form SSA-1099)
- How much are the benefits?
If you’ve been married for at least 10 years and are at least age 62, you might be eligible to claim Social Security based upon your ex-spouse’s Social Security record. Even after divorce. And your ex-spouse can’t stop you from claiming benefits based on their record.
However, you would want to consult with a financial planner who specializes in Social Security planning. That’s the best way to ensure you’re evaluating all of your Social Security options and selecting the one that’s right for you.
Line 7-Capital Gains
- End of year investment statements (Form 1099-B)
- Capital gains distributions (usually from mutual funds) might be reported on Form 1099-DIV.
- Is there a lot of selling activity here? If so, you might want to look at where the proceeds are going.
- Are there any tax losses? If so, take note. Tax losses can be carried forward for future tax years, known as a tax loss carryover.
When dividing assets in a joint account, you probably would be entitled to split these losses. But don’t count on your spouse to bring that to your attention.
You also want to make sure that your spouse isn’t playing games with tax basis.
For example, a sneaky move would be to keep high-tax basis assets for oneself. Then set up an investment in their spouse’s name and transfer appreciated investments into that account. That way, their ex gets stuck with all the tax bills down the road.
If there are significant capital gains, then the tax return will be accompanied by Schedule D. Schedule D is the document that your financial planner or accountant might need to ensure that your investments aren’t being manipulated.
Line 8-Other income
This is a line that summarizes everything covered in Schedule 1. If Line 8 is blank, then that’s okay. But you may still want to be familiar with the items that are covered in Schedule 1. That way, you can be aware of things that should be reported, and happen to be missing.
Below is a partial list of the more common sources of other income you should know about:
Taxable refunds, credits, or offsets of state and local income taxes
Different states have different taxes. This might not be of significant importance in low-tax states. But it might be worth considering in high-tax states like California and New York.
If your spouse is a sole proprietor, there should be some number here, and the tax return should be accompanied by Schedule C. If this is the case, and the business is more than just a hobby, you should hire a forensic accountant to review the business books & tax returns.
Rental real estate
If your spouse has rental real estate or an investment property, there should be some number here, and the tax return should be accompanied by Schedule E.
Pass-through businesses & trusts
If your spouse is a business owner (partnership or owner in an S-corporation), or is the beneficiary of a see-through trust, then their income would be included here. And the tax return should be accompanied by Schedule E.
Farm income is reported on Schedule F.
Taxable Health Savings Account distribution
An HSA has a lot of tax advantages. You should keep an eye on this number as well as Form 8889 (Health Savings Accounts).
Income from the rental of personal property
Suffice it to say, if your spouse has a business, there will either be a number here, or on Line 17 (Schedule E).
Above the Line Deductions
Above the line deductions are used to calculate adjusted gross income (AGI). These deductions are also included on Schedule 1.
Some of the more common above the line deductions are listed below.
Line 13-Health Savings Accounts (HSAs)
- Transactions in an HSA are reported on Form 8889. This might include contributions (employee and employer contributions) or withdrawals.
- Did you know there was an HSA? If not, you’ll want to make sure to include this in the property division.
Line 16-Self-Employed Retirement Plans: Contributions to SEP, SIMPLE, profit-sharing, or 401(k)
- Did you know there was any sort of self-employed retirement plan?
- If not, did you know that your spouse had self-employment income?
Line 20-IRA Deduction: Deductible IRA contributions only
- Did you know about an IRA?
- Is this for your IRA as well as your spouse’s?
- This is only for deductible IRA contributions.
Note: Make sure you also look into non-deductible IRAs, as well as Roth IRAs, which will not show up here.
Non-deductible IRAs are found on IRS Form 8606-Non Deductible IRAs. If applicable, this should be included in your tax return each year.
Line 21-Student Loan Interest
Note: Student loans aren’t assets, they are debt. However, you should make sure your student loan payments are included here, especially if they’re for education you obtained during your marriage.
When the divorce process starts, it’s in your best interest to have the right financial information. While an experienced attorney can help you with the legal process, you should take steps to protect your own money.
It’s amazing to see how much information you can uncover by reviewing your financial documents. And using your tax return can help you take the first steps towards the discovery of hidden assets.