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Marital & Family law Section Chair : SusanMilesWhitaker – BayAreaLegalServices , Inc . alwaysasktoreview contractsofthecompany andbeawareofaccounting entriesthatdon ’ tseem tomakesense .
The Profit and Loss statement of a company rarely tells the whole story . At first glance you might see expenses such as “ Retirement Contributions ,” “ Tax Payments ,” and “ Management Fees ,” followed by a resulting net loss or very small profit . To the layperson this may look like the owners of the company are not making any money . If you take a closer look , you might find another story altogether .
Paying Personal Expenses Through the Business
When this occurs , instead of classifying expenses as a distribution to the owner , they are classified as expenses of the business . Personal expenses can be found in any income statement account classification . The best piece of information to obtain in order to quantify personal expenses paid by a business is a General Ledger . A General Ledger is a record of all transactions that occur within a company for a specified time period .
Overpaying Taxes
Another way that a person can hide income is to pay more taxes than they actually owe . While the books of the company show a large expense , what they probably don ’ t show is the refund due back from the IRS . Be sure to see if there is a refund due from the IRS on page 2 of the personal tax return ( Form 1040 ), as this would be considered an add-back to income .
Padding Retirement
Matching retirement contributions for employees is a legitimate expense . Excessive retirement contributions to the owners ’ retirement account are not . It is important to consider the ownership structure and policies of a company . Does the company even offer retirement benefits to its employees ? What you may find is that “ Retirement Expense ” is actually a way for the owner to move money from the company to their personal accounts .
Becoming Underemployed
From the dentist who is seeing 50 % less patients this year , to the roofer whose number of jobs suddenly declined right around the date of filing of their divorce , there are many ways to become underemployed . Ask yourself , does it make sense that this person is saying there are no other jobs available to them ? Is this person making a conscious decision to accept less contracts so that their income appears to be less than it was in prior years ?
Management & Consulting Fees
This is another type of expense that could be legitimate but should be given further consideration .
Sometimes what you will find is that a company is paying a management fee or consulting fee to another company that they also own an interest in . A quick business entity search on the State Division of Corporations website can reveal if the fees are going to a related company .
Cash Payments
It is extremely important to fully understand how a business operates . If the company accepts cash payments , it will be rife with opportunity to hide income . Always ask to review contracts of the company and be aware of accounting entries that don ’ t seem to make sense . Reviewing the bank statements of the company might also reveal unexplained deposits . If a company has more write-offs or deposits than you expect , the accounting may bear further scrutiny .
The number of ways to hide income in a closely-held business is limited only by the owners ’ ( or accountant ’ s ) creativity . If income is at issue , it would not be prudent to accept an Income Statement at face value . n
Author : Sasha M . Moore , CPA / ABV , CFE – CBIZ Forensic Consulting Group
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