EP 81: Common Ways Your Spouse May Hide Money - Interview with Mark Kohn, Forensic Accountant

magnifying-glass-finding-money

"Some cases you can see that it looks like it’s going to be easy...to prove to a judge. Other cases look like it’s going to be very difficult and maybe just try to settle and do the best you can. It’s not a black and white situation." - Mark Kohn

Episode 81 of the Divorce and Your Money Show interviews Mark Kohn, a highly experienced forensic accountant and author of How they Stash the Cash: A Guide to Finding Income Hidden by a Spouse during Divorce. He is based in Los Angeles and can be reached at http://www.certifiedva.com/Kohn/ or mark@kohncpa.com.

He is going to teach us a lot of very important information, including: 

  • The two most common ways a spouse may hide assets
  • When should you hire a forensic accountant
  • What documents you need to prepare for a forensic accountant 
  • When using a forensic accountant can be a waste of money
  • Why a private investigator can be your best friend in solving hard to reach cases

And much more!

This transcript has been edited for clarity. 

Shawn: Today I have on the show with me, Mark Kohn. He’s a Forensic Accountant and Author of How They Stash the Cash: A Guide to Finding Income Hidden by a Spouse During Divorce. Mark, welcome to the show.

Mark: Hello! Fine, thank you. 

Shawn: So Mark, why don’t you give the audience a little bit about your background. You have quite a number of degrees and qualifications. Give us a little intro about yourself. 

Mark: I have been doing this for around 28 years, forensic accounting and divorce. That includes business valuations; the two go together. The determination of income goes together with the value of the business. Usually the kind of cases I get are cases involving potentially unreported income. To the extent of the unreported income to that extent, the value of the business goes higher. In California which is a community property state –we call that the out spouse –the non working spouse is entitled to basically 50% of the value of the business, unless the business was started before marriage which is more complicated. There’s two major things that go on in every case in California; how much does the souse earn, and what’s the value of that spouse’s business. To the extents you find hidden incomes, the income goes up, child and spousal support goes up, and the value of the business goes up. Sometimes there is unreported income and sometimes there’s not. There’s no guarantees and I never make any promises. That’s what I do basically. I look for what’s the basic income of the person and how does that affect the value of the business. That’s the two major assignments that go on in most cases. 

Shawn: If someone wants to hire you, what are the signs that there might be hidden income. Do they know in advance? Is it obvious? Sometimes it’s trickier? How do you figure that out or even think to contact you?

Mark: There’s two things. People don’t think to hire me. Officially they do. It’s lawyers who hire me. If somebody calls me from the blue, I tell them that their lawyer should call me because the lawyers are used to working with forensic accountants that they work with. Sometimes it happens that the client hires me and tells their lawyers to hire me. The procedure usually is the lawyer tells the client you must hire Kohn. So that’s the procedure. 

The second question you asked is how do you know or what makes you think there is unreported income?  Sometimes it’s easy as can be. Sometimes the out spouse has copies of the tax return. I’ve had cases like this where the report is adjusted income or the total income is let’s say fifty thousand a year and they live in a five million dollar home, and they both drive top of the line Mercedes and they vacation in cruises all around the world. They live a very wealthy lifestyle but the tax return shows basically, poverty. Those are the great cases. Then, the trick is to prove that., to prove there’s unreported income. It looks like unreported income, it smells like it, but you’ve got to prove it then. That could be challenging.

Shawn: So what kind of documents or support do you look at to determine if there might be hidden income? What should someone have prepared for you?

Mark: The starting part they should have is the personal tax returns, and just the description of the lifestyle. If somebody says here’s my tax return that shows low income, and they describe the lifestyle that shows wealthy, then I say “Well, you seem to have a good case.” That’s it. The details of how to find how they’re hiding the income, the client who is usually the out spouse, doesn’t have those records. We have to subpoena those records.  

Shawn: So, it can be a little bit of a fishing expedition it sounds like. 

Mark: It’s very much a fishing. The one case I had that was extraordinary, I went to the court of appeals and appealed it. The husband refused to provide any records. He provided records showing tax returns of very low income, and then he refused to provide any other records. The lawyer I was working with filed a motion, and he refused to comply. There was like zero records and my lawyer said to just do whatever you do. I asked the client for photos and the client gave me a million photos of the Mercedes and the BMW and the huge swimming pool, and the horse, and the racing car and everything else. I just prepared a declaration with all those photos and I said, “To have this you have to had earned at least so much money. Therefore, the value of the business is so much and therefore his income is so much.” The trial court agreed with it and the court of appeals agreed with it. Sometimes you end up with a case where they’re literally no records but you have to sometimes work around that. It’s hard if the judge is new on the bench and doesn’t know what they’re doing, and they’re not confident. That’s the tricky part. Convincing the judge is sometimes challenging. 

Shawn: That’s a good segue. You said that particularly in California there may have been a lot of turnover lately amongst some of the judges, and that occurs across the country just given the workload, and some of the craziness involved in family law and family court. Why don’t you tell us a little bit about your experiences with judges? Do they understand what’s going on? Do they care? How does that relationship work in what you’ve seen over the past almost three decades?

Mark: If the judges have been there for a few years they’ve seen lots of examples of unreported income, they understand it, they believe it, and they relate to it. The judges worked their whole lives as a partner in huge law firms and they themselves reported all their income because they had to. They get K1’s from these partnerships. They themselves report their income, when they’re new on the bench. They don’t report to this idea of people having massive unreported income. They can think in their minds of unreported income as being a two hundred dollars. I’ve had cases where people reported a hundred thousand and didn’t report nine hundred thousand. They’re reporting ten percent. That’s so hard for the new judges to understand, they don’t believe it. So when they get a case like that they think the forensic is out of his mind, or he’s trying to satisfy somebody like the lawyer and he’s concocting crazy theories. After a few years on the bench they’ve heard already hundreds of these cases. At that point they don’t even believe any tax returns. It’s a migration over the time. Usually they leave within a year so by the time they get close to having some kind of understanding, they’re gone. Then you get a new judge, so it’s rough. 

Shawn: What do you recommend in those situations for the attorneys and the clients who you help? Do you tell them it’s not worth it? Do you tell them it had to be an egregious example to pursue? How do you handle that?

Mark: That’s exactly what I try to do. I’m just an accountant. I’m a nobody in the scheme of things. The main driver is to some extent the client, and to a large extent, the lawyer. Sometimes the lawyer, for whatever reason – if they feel like there’s an injustice going on or if subconsciously they just need some extra billing, you never know – the driver is quite often the lawyer and sometimes they say, “Well we’re going to justice even if we bankrupt the client.” They don’t say it that way but I’ve seen that happen. My opinion is just an opinion, it’s not the driving force. If I see that it’s a difficult case to prove, I tell everybody this will be difficult, and if it’s difficult it’s expensive, and ask if they’re sure it’s worth it. Some cases you can tell it’s going to be difficult. Other cases you can tell right away, this is easy. I can look at certain tax returns and I can say instantly, that’s where the unreported income is. He has fake deductions and you can see it, it’s right there just about. You can almost see it. 

What I do initially is I give it an initial look through and I give the feedback to the lawyer saying this is either easy, or hard, etc. Sometimes my opinion doesn’t matter anyway. They say, “We’ll do the best we can,” or whatever. Some cases you can see that it looks like it’s going to be easy. Easy to prove to a judge. Other cases look like it’s going to be very difficult and maybe just try to settle and do the best you can. It’s not a black and white situation.

Shawn: Do you work with other professionals? Maybe a private investigator for some of your cases when you’re looking into things?

Mark: I never worked with private investigators. If you read my book, I highly recommend private investigators. They are phenomenal. The one’s that are good, are great. They often do things illegally. I don’t want to say it that way because I don’t know. Sometimes I do know. They sometimes do things illegally like go through the trash, and the trash is located in a place where they’re not really allowed to go, and they get it anyway. When that happens I’m given sanitized information from the lawyer that I should take a good look at the Wells Fargo account, or whatever. There might be stuff like that. What often happens is they’ll find the trash and they’ll find something interesting, and then the lawyer will know that he’s got an account at this strange bank over here. So then the lawyer subpoenas that bank and then the return of subpoena is given to me.

I’m never aware that there is a private investigator. Remember I have no privilege. If there was a private investigator and he was doing something illegal, and that shows up in my emails, the whole case can fall apart because then it becomes disclosed that illegal stuff is being done. Private investigators are wonderful but I never talk to them. I’ve been in cases where they’re used, but I don’t talk to them. On one case I was on it was great. The case settled purely because of the private investigator. For a little bit of time I was getting copies of the trash, and then I was advised that I would never again see it because they moved the trash into a different location, and now they’re still getting the trash illegally, so I was cut off from the trash.  

Shawn: So for the people who are not in California, are there certain qualifications that they should look for when hiring a forensic accountant or considering forensic accountant?

Mark: They should look for somebody with experience. It’s not nice to say that the people that are starting out, unfortunately have to get the experience. Without experience you don’t know what you’re doing. You could be floundering around and looking at a million things, and just wasting time. I’ll give you one example. I once had a case –I won’t go through the whole details –and there was a document production in a law firm. I went to the law firm and I was sent to a big room, and there was like sixty something boxes in the room. They said, “Here! Go through them. Here’s the documents you asked for.” Sixty something boxes! If I was a junior accountant, I would go through all sixty boxes and spend like three weeks, and send this horrendous bill to the client, and go nowhere with the thing. I had a funny feeling and I said, “I know what I need, and I know what I don’t need.” Thirty boxes I did in an hour. It was just print outs and stuff; I didn’t need that. Then I actually found a critical document; an old document like forty years old that proved a certain legal theory. Within like two or three hours I found that document, which I didn’t expect to find, I copied it, and I went home. The case settled like a week later. That proved the whole point. Somebody who didn’t know what they were doing would have gone through all sixty boxes and worn out completely, and never even notice that old piece of paper. You have to find somebody who has been doing it for a bunch of years so you get a feeling for where is a waste of time and where is not a waste of time. 

One of the maneuvers is to drown you with nonsense. I get a return on subpoenas and I got a return recently from Wells Fargo, twenty thousand pages. If you don’t know what you’re doing it can take a long time to go through twenty thousand bank statements, and that’s just one return. Either you have a system of doing this efficiently or you don’t. If you waste time you get drowned in the trees and you miss the forest, so that’s that problem. 

Shawn: In addition to experience, are there certain academic or credentials that a forensic accountant should have?

Mark: Well, that’s an interesting question. You should have a credential so that when you cross examine they cannot impeach you by saying that you’re not qualified. I have like two credentials in business valuation just so that when I value a business, nobody will question my competence. I’m a certified fraud examiner because I was once cross examined and I asserted fraud and the lawyer asked, “Are you a certified cross examiner? How could you assert fraud if you’re not certified?” and I said “No.” At the time I answered, “I’m not a certified cross examiner.” Within a week I started the process of becoming one. 

Many of my competitors have very few credentials, but they’ve been doing it for twenty-five years, and everybody knows that they are competent. So everybody stipulates their competence. If you’re new at it, then there’s no reason why anybody should accept your opinion. If you’re starting out relatively new at it, I recommend getting at least one credential in business valuation, and becoming a certified fraud examiner. 

Shawn: One last question before we wrap up. Are there some common recurring themes you see for how spouses might hide income from each other? You said it can be obvious when the income doesn’t match the lifestyle. Are there other things that people should keep a lookout for that might indicate that something is a little bit off?

Mark: There’s two basic ways of hiding income in the business. That’s where the action usually is. I tell lawyers, as far as my experience, most people do one or the other, they don’t do both because it’s mentally hard to do both. The two basic things they do is either they don’t report the gross income, or they inflate their expenses. Some businesses more or less have to report all of their income because all their income is paid by credit card, or they get paid by check. You can still maneuver all that, there’s still plenty of room to maneuver. Those people, the receipts are sort of locked or the report is on paper and visible. They will often then inflate their expenses. They will pay for every personal expense through their business. Many spouses know that. They will say, “Our vacations are paid by the business. Our medical expenses are paid by the business. Our clothing is paid by the business.” I’ve seen businesses where the whole households clothing is paid by the business, and on the business tax returns it’s called uniform expense. So you can tell because it says uniforms. Then you look at the general ledger and you see it’s all payments to Nordstrom. It’s kind of funny that Nordstrom is selling uniforms. It’s obviously not. The two approaches; either their expenses are packed with personal items, and for that you need the general ledger. Otherwise it’s the gross income that’s not being reported. That’s more difficult but that can be done. 

Shawn: That’s very helpful for people to kind of keep an eye out for. Mark, what’s best way for people to contact you?

Mark: The best way, and what I prefer is email: mark@kohncpa.com 

Shawn: Excellent. Well Mark, thank you very much for being on the show. 

Mark: Okay, my pleasure. 

Shawn: Thank you Mark, I appreciate the time. Very nice explanations and good insight.

Mark: Okay, my pleasure. 

Shawn: Alright well you have a good rest of your day!

Mark: Thank you so much. 

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for a full transcript of this episode and be sure to check out the NEW course Divorce 101: Steps to Take Before Divorce.

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Shawn Leamon, MBA, CDFA

Dallas, Texas

Shawn C. H. Leamon is Managing Partner of LaGrande Global, a firm that helps successful families manage large financial transitions like divorce, inheritance and selling a business.

He earned his Bachelor of Arts from Dartmouth College, double majoring in Economics and Philosophy, and his Masters in Business Administration at Spain’s IE Business School.

Before founding LaGrande Global, Shawn helped manage $1.1 billion in client assets at Bernstein Global Wealth Management. He also worked as a credit research analyst at J.P. Morgan. He is a Certified Divorce Financial Analyst, and he has been an advisor to numerous high-stakes divorce cases.

Shawn is the author of two well-received finance books: Managing Private Wealth: Principles, and Divorce and Your Money: The No-Nonsense Guide, both published in 2016.

In his spare time, Shawn is an ultra-endurance athlete and has competed in events as long as 24 hours. He is an Eagle Scout and a member of the Alumni Board of Greenhill School.