Able Investigations

Techniques Used to Find Unreported Income and Hidden AssetsFinding unreported income and hidden assets is not a matter of guesswork. While success is never guaranteed, the use of certain techniques may produce successful results. Here are a few tips to consider:1. Look at the lifestylesOne of the first steps is to look at the lifestyle of the person earning the income and match it with the income being reported. What kind of car does he/she drive and how was it paid for’.) What kind of clothes are being purchased, where does he travel and what hotels does he stay at? If there is a disparity between the lifestyle and the reported income, then one must look at the person’s debt to see if the lifestyle is paid for by borrowed money. If the debt has not increased, one must look for other possible explanations, such as a recent inheritance. If nothing seems to justify the lifestyle in excess of the reported income, then there is a good possibility that unreported income is funding the lifestyle. This hypothesis, with its justifications, may not, by itself, be convincing to the court, but it will lend significant support to other evidence.2. Look at the expensesCertain expenses are indicative of the nature of the business and often they can be verified. In the above example of the restaurant, that business sold a huge amount of beer. Since there are only a small number of beer distributors and their records are computerized, it is relatively easy in such a situation to determine the volume of beer being purchased. The same technique was used in a case involving unreported pastrami sales. The key to the case was determining the amount of raw beef navels purchased. Once one knows the amount of goods purchased for sale or manufacture, the actual sales can be determined fairly accurately after one determines the usual markup.Similarly, certain manufacturing processes may require certain usage of utilities. A product that has water as a main ingredient will have production in direct relationship to the amount of water being used by the factory. A review of the company’s utility bills may demonstrate whether production is going up or down. If the business records show that sales are down, production is down, but water usage is up, then someone will have to explain the disparity.3. Look at the cash flowHow does the money come in and who receives it’? If a certain person opens the mail, records what payments came in, and then delivers the checks to a second person, who actually makes the deposits, then there is good internal control over the funds. In that situation, it is probable that all receipts are being recorded. In smaller businesses, such as in professional practices, it is possible for the same person to open the mail and to make the deposits, and it is not unusual for the owner himself to get the mail once in a while. Furthermore, payments are often made out to an individual instead of the formal business name. Particularly with a professional practice, the name of the person is often the name of the business, or a client may issue payment in the name of the partner who provided the services. In situations where the owner might open the mail and where checks could be payable to the owner, one should review the accounts receivable records with the cash receipts records. All write-offs of significant amounts should be reviewed to see if the write-offs are merely cover-ups, for receipts that were simply deposited into a personal bank account instead of the business account. The writeoffs should be supported by documents indicating attempts to collect, such as correspondence, letters from the company’s attorney, lawsuits, etc.4. Look at the business operationsA visit to the business premises is very helpful. and sometimes it helps rule out certain areas which might otherwise be explored. For example, a business with gas stations has less of a probability of unreported income than a supermarket. A visit to the gas stations will show that all sales, in dollars. is reported by each gas pump. If the owner does not work at the gas station, he would not want the pump to malfunction, because that is his only way to determine that his employees are not stealing from him. Therefore, the pump equipment itself is very useful in determining the actual sales. In a supermarket, an owner could simply arrange that certain cash receipts are simply not deposited. It is essential to understand how the business is run, how often the owner comes to the business. what is his relationship with his employees, etc.5. Look at the industryThere are statistics available for many businesses, and the statistics of the subject business should be compared with others similar to it. In particular, the gross profit margins should be compared, and the overall profitability should be compared. If in the industry, it costs fifty cents for each dollar of sales, and in the subject business, it costs sixty five cents for every dollar of sales, then one should examine the expenses to see if they are inflated by personal or unusual expenses. It may be that there is a logical explanation for the variance of the subject business from the industry norm, but the variance itself is an indication that something is unusual, and deserving of special analysis.SummaryIn summary, while it is often very difficult to find unreported income and hidden assets, sometimes clues are left that are very meaningful to a trained eye. The problem then becomes a matter of proving the allegation, rather than determining it.