The search for unreported income is often relevant to divorce and
bankruptcy cases, breach of contract and/or partnership disputes,
insurance claims, and fraud or criminal investigations.
MICHAEL HAUGEN, CPA/CFF, CFE
EPPS FORENSIC CONSULTING PLLC
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article or to discuss your financial expert witness needs.
Where’s The Money?
How to Discover Unreported Income
Attorneys are best informed to navigate complexities that arise in the search for unreported income by retaining a forensic accountant early in the process.
Navigating the Search
Retaining a forensic accountant early
in the process helps facilitate discussions about the possibility that a suspect has hidden assets. It reduces the
time necessary to gather the documentation that a forensic accountant
will request to review, and perhaps
most importantly, by working as a
team to share information, attorneys
and forensic accountants can effectively discover undisclosed assets.
Uncovering Hidden Income
Measuring unreported income often
involves reconstructing a suspect’s income and comparing it to their reported income. Several different methods
may be used to reconstruct an individual’s income.
The specific technique or analytical methodology applied to uncover
hidden income will vary depending
on the nature of the case and the
documentation and information available for review. It is crucial that an
attorney identify the issue(s) that
gave rise to the suspicion that income was underreported, or not reported at all. With that understanding, a forensic accountant is better
able to focus the investigation and
determine the best approach to uncover any such amounts.
Testing Income and Expenses
One approach to measuring unreported income involves testing a suspect’s
source and application of funds. This
method compares all known expenditures with all known sources of funds.
To the extent expenditures exceed
known sources of funds, such amounts
potentially represent unreported income. This is corroborated, when possible, by the preparation of a net worth
statement to verify whether or not it
appears a suspect funded an expense
by liquidating an asset.
Change in Net Worth
Another approach to measuring unreported income involves testing the
change in a suspect’s net worth. Net
worth is determined by deducting
total liabilities from the value of total
assets. Comparing the change in net
worth during a period of time, with the
reported income during the same time
period, may identify unreported income.
The net worth method is more comprehensive than testing a suspect’s
source and use of funds and requires
greater financial records and information to be completed.
Financial Tests for Business Owners
A case for investigating unreported in-
come of a business owner can involve
many different types of financial tests.
For example, profitability rates can be
compared to industry standards to as-
sess whether or not it appears income
is underreported. If unit sales volumes
are reasonably established as accurate
and complete, they can be used to cal-
culate anticipated income and com-
pare that to reported income.
Reconciling various sales reports to
bank accounts may yield deposits from
sources unrelated to reported income,
requiring further investigation.
Discovery Process is Critical
The key to any method applied to
measure unreported income is having
the necessary information and documentation to complete the analysis.
This means that the discovery process
The document production request,
interrogatories, and deposition testimony must be sufficiently comprehensive to include all relevant documentation and information available.
It is best for attorneys to retain a forensic accounting expert early in the
process of searching for unreported
Note on the author: Michael Haugen is
a Certified Public Accountant, Certified in
Financial Forensics, and a Certified Fraud
Examiner. At Epps Forensic Consulting
he has assisted legal counsel, insurance
carriers, law enforcement and business
owners in the successful resolution of
hundreds of financial damages claims
involving hundreds of millions of dollars.
As an industry leader he has presented
continuing education seminars across
the country and is focused on continuous
professional development and building