Mark Kohn has built a career out of finding hidden money. The Los Angeles-based forensic accountant usually has a secret weapon that the taxman doesn’t: an estranged wife or husband willing to tell all.
Spouses know when business owners use company funds to buy sports cars, pay for birthday parties or hire children for jobs they never do. Their motive in squealing: To get a fair share in a divorce settlement. Kohn is hired in cases when one spouse is suspected of hiding business income.
In California, community property laws mean both spouses usually split evenly any businesses built while the couple was married, even if the business was managed by only one spouse. While those frauds may start as an effort to save on taxes, they’re often continued in an effort to shortchange their estranged spouse by lowering the estimated value of the business.
Take the man who reported an official salary of $500,000 while enjoying a real income of $2 million, Kohn says. The extra $1.5 million was hidden as fake business expenses that were actually funding his lifestyle, including $1 million to remodel his house.
Even when spouses aren’t involved in business matters, they can easily spot ridiculously low income on tax returns. (The IRS’s “innocent spouse” rule protects spouses from tax evasion charges if they didn’t know what was going on. If they can be implicated, they might want to settle out of court, Kohn says, even though judges often don’t report hidden income uncovered in divorce cases to the IRS.)
Kohn recounts a client whose husband said he had a salary of $100,000, even though he was spending at least $100,000 per year at nightclubs and dinners. “She knew the salary was wrong,” Kohn says. For one thing, she’d found $50,000 in cash under the sofa one day.
Kohn wrote a book about his 25-year career called “How They Stash The Cash.” His goal, he says, is to tell spouses that they “should not get overly depressed and give up hope of ever getting a fair deal.”
Business owners, including doctors, lawyers, accountants and restaurant owners, typically hide income by either inflating their business’s expenses or understating revenue, Kohn says. These efforts can get sophisticated. At one restaurant, waiters used software to log every order, including those paid in cash. That might have made hiding money difficult, had the restaurant owner not deployed another software program, made in Mexico, specially designed to hide profits.
Sometimes hiding income is very simple: One accountant hid a third of his income by depositing one of every three checks from clients into a personal brokerage account rather than his business account.
The more “amateurish” efforts to hide income from spouses are easy to detect, Kohn says. Time and time again, businesses in divorce proceedings see their profits nosedive starting just about the time the divorcing couple separated. “That’s an old pattern that all the judges know,” Kohn says.
Business owners can hide income by taking payments in cash. Kohn once investigated a plastic surgeon who said his business was declining despite the fact that his purchases of medical supplies was going up. Sometimes the books are so cooked that a spouse’s only option is to hire a private investigator to do accounting legwork. That could involve an investigator sitting in a bar to keep track of how many drinks are being sold.
The IRS has trouble finding such fraud because on paper the finances look legitimate. Many people Kohn investigates have survived routine IRS audits unscathed, he says. But while their filings show a modest middle-class income, their lifestyle reveals a steady flow of cash. For example, “A horse is a good clue that there’s a lot of money,” Kohn says. “Horses are expensive.”
Other than outsized spending, another red flag is when someone hires various accountants to handle different aspects of their business and personal affairs. “That’s an immediate alert that there’s tax fraud,” Kohn says, because it shows someone reluctant to reveal his full finances to any one accountant.
Since he works in Los Angeles, Kohn is often asked if celebrities ever hide income in divorces. That’s rare, he says, because anyone making “real big dollars” usually has a business manager keeping detailed records. The same goes for businesses that are partnerships. The more people involved, the less likely they’re lying about money because “Everybody’s got to be willing to commit tax fraud,” he says.
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