Do You Need A Forensic Accountant For Your Divorce?

Note: Our Podcast, “A Year and a Day: Divorce Without Destruction”, was created to be heard, but we provide text transcripts to make this information accessible to everyone. All transcripts on our website are created using a combination of speech recognition software and human transcribers and could contain errors.

Welcome to a year in a day. I’m Jamie Davis, board certified family law attorney at Gaylor Hunt. On this show, I talk with lawyers, psychologists, and other experts with the goal of helping you navigate divorce without destruction. In this episode, I’m talking with forensic accountant Robert Nordlander. In addition to providing services for white collar crime investigations, bankruptcy proceedings, and employment tax disputes, Nordlander CPA PLLC ensures that clients achieve the best financial outcomes in divorce proceedings. So today we’re talking about how income and assets are accounted for, mitigating unpaid tax liabilities, and when you might need to hire a forensic accountant for your divorce. Thanks for joining me, Robert.

Robert: Thank you. It’s a pleasure to be here.

Jaime: So what is a forensic accountant?

Robert: A forensic accountant is an individual who looks at financial records and financial statements and is available to testify about them in court. And that’s really what it is. Forensic really means court. So you think about when you go to a crime scene, you get the blood, you got the gun, you got the bullets and everything else. There’s a forensic analysis that goes on and talks about the report, whose blood it was, and they can testify to that in court because they’re qualified to testify about that. It’s the same thing with accounting and financial statements and accounting records is that there’s a professional that the judge allows. The judge is the gatekeeper to testify to certain aspects of the accounting records, and usually it’s to help the judge and to help the jury understand what’s going on.

Jaime: How are your skills different from a typical CPA?

Robert: Well, I would like to say that the CPA, for the most part, is an individual who can audit tax returns and understand financial statements. And there is a certain skill set to that. But there’s also a little niche that if you understand how to prepare documents for the average person to understand, like a jury or a judge or an attorney or maybe a defendant or your client, you should be able to talk about where the money come from, where the money go to. It’s more of a granular level type of accounting where we talk about particular transactions in detail. CPAs are usually our auditors in many ways, there are auditors, and they will go in and look at the big picture of a financial statement and give an opinion about whether or not this financial statement is correct or not. So people can invest in the company or lend out money to the company with some reliance on the financial statements that they are correct? Right. A financial accountant does not do that. They go into the granular level. How does this person steal money and what do they do with it? That type of thing.

Jamie: Got you. So let’s talk a little bit about how this might apply to a divorce case. How can a forensic accountant be helpful in a family law case?

Robert: There are really two ways. Number one is the way that if you look at the typical divorce is going to be when a spouse one spouse is hiding money from the other and they go through a divorce proceedings. Typically it’s the male earning the money and the female is maybe the housewife or did not earn as much money, that type of thing. And in many cases it is the husband that’s self employed. And so there is a dispute about how much money one spouse makes because they’re supposed to in court show all the income and assets and liabilities, what’s this marriage have and the income that each spouse has to figure out the alimony and the child support. And a forensic accountant would come in and take a look at that and say, yes, this financial statement appears to be correct or not correct. And many times it is the female in the relationship that will hire a forensic accountant because they believe that their husband is not turning over all the records that are supposed to do so. And so if there’s smoke, there’s probably fire. And so when that happens, I would get involved and look at the financial statements and look at the records and look at the bank statements and kind of get an idea to the attorney that’s representing the spouse. This is what I see. This is where you may want to go down the road. There’s maybe something there or not there. And at the end of the day, the second thing is that once that conversation is had, then does that forensic accountant, is he or she needed to testify in court about the findings for the lawyer? But almost always a forensic accountant is hired by an attorney to assist them and through this process.

Jaime: So are there certain red flags that a person should look for if they think their spouse might be hiding money?

Robert: Yes, there is. One of them is a cash lifestyle where one spouse always has cash, but yet the other spouse doesn’t have any because of the control issue is what it is. Unusual spending would be another one, for example. And this quite happens quite often. I’ll look through some financial documents and I’ll ask, hey, this jewelry store for $3,000, what was that for? What Jewelry store purchase.

Jaime: Right. The wife didn’t get the gift, right?

Robert: Yeah, she didn’t get the gift. Yeah. And they’re like, oh, okay. So there’s probably another person in this picture that has received some of the marital benefits or assets that the wife did not get. So that’s another thing. It’s unusual expenditures type of thing.

Jaime: Okay.

Robert: But cash lifestyle and unusual expenditures, usually those are the two main ones that I see in a divorce proceedings.

Jaime: So other than finding hidden money or assets, are there other ways that a forensic accountant can be helpful in a divorce case?

Robert: There is many forensic accountants. Some of them have the skill set of taxes and as well as trying to figure out, okay, if you’re going to split the assets, what is the best way to split it to where it’s equitable tax wise? Because not all assets have the same equity. When it comes to taxes, for example, the equity in a house is tax free, but the equity in an IRA, what’s in the IRA would not be. So if you start splitting up the house, I get the house and he gets the IRA. Well, when it comes to taxes, that IRA is not really $100,000. By the time you pay tax on it, it’s probably $70,000. But this house equity, $100,000, equals $100,000. So you have to make some type of considerations that if one spouse gets one asset versus the other, are you taking the taxes into consideration? That’s really the biggest thing that I see, is to make sure that both parties are getting a fair shake, right.

Jaime: Just making sure it’s apples to apples and that it truly is an equitable distribution.

Robert: Correct. Another thing is that there’s times where a forensic accountant can look at some assets and also help out finding the income that is not necessarily on a financial statement or on a bank statement. I’ll give you an example. A CPA and attorney should be able to get access to some tax records because the IRS is a huge vacuum of information. And if you can get access to tax records that maybe show you where the hidden bank accounts are at, or maybe there’s an extra house out there or some type of mortgage interest or some other activity out there that was not known at the time, that somehow is hidden from the marital bank statements.

Jaime: So an issue that I’ve seen in my cases, and it sounds like a forensic accountant might be helpful here, too, is that if you have a small business owner and let’s say my client is not the business owner, and she really can’t get a handle on her expenses because a lot of the expenses are being paid through the business, Some of the personal expenses. Is that something a forensic accountant can help with as well?

Robert: Yeah, they can separate out what is truly a personal expense versus a business expense, because you’re right, and many times these small business operators will. I’ll give you a small example. The cell phones, the family cell phone is always paid by the company. They shouldn’t be doing it, but they do it. But yet when it comes to the cell phone bill, when it starts separating the assets and income, the expenses, we got to start splitting some of that stuff out, saying, yes, this is really what the true cost is. Or maybe example, the business is paying for the child education, right. But it’s not going through the marital checking account per se. And then you have to start splitting some of that stuff up. So like you said before, it’s trying to find apples and apples and oranges and oranges to compare it to make sure that when there is a split, that all the information is known and everything has been split properly.

Jaime: So through asset and income tracing you can find hidden assets or income. How does that process work?

Robert: Well, the first thing you have to do is number one, from a practical standpoint, what we do is what do you have now at your disposal, which is the bank statements and typically the credit cards. What cars do you have, what houses do you have? A lot of these known things. And what we’ll do is it’s, for instance, accountant. We’ll look through that and then we’ll start pulling threads about, okay, money went over here. That doesn’t look normal, let’s go down that road. Maybe there’s another bank account. And I’ve seen this plenty of times where I get the documents and I look at it going, okay, there’s some money that transferred to a savings account. Really? Yes, there’s a money transfer. So we got to go down that road to get that savings account information to find out what’s going on. That’s really the big thing. Or if there is a car, but I don’t see any car payments coming out of that checking account. How is the car payments being made? So you go back and say, okay, how do we figure that out? And in many times it can be a slow process because as a forensic accountant, I do not have access to records. I can only look at what I receive and it either has to come from one of the spouses or the attorney has to go back to court and demand more records for me to look at. And it’s really just pulling the various threads and getting a big picture. It’s sort of like you do a puzzle, you get the edges first, right? You start separating out colors and things of that nature and kind of put the pieces of the puzzle together. It’s kind of the same way where you start looking at various things that just don’t fit or things that fit in a certain category. Like, okay, we’ll look at that and we’ll go down that road sooner later on.

Jaime: So it sounds like as long as there is a paper trail and folks are using accounts that have statements, there is a way to trace and follow the money. But cash is probably a lot harder. I mean, how do you deal with it if there are just a lot of cash transactions? Is it really possible to track that stuff down?

Robert: It is very difficult, to be honest with you. If one spouse is taking money out of the ATM machine and going out to the strip club, there’s no way to know about this stuff type of stuff. Only the large purchases of cash like buying a car or buying maybe expensive piece of jewelry or buying a motorcycle or buying a boat. Can you really know where the money went to? There are occasions where cash has been taken out, and then later on you find there’s a safety deposit box somewhere, and then the cash is stored there. But most of the time, people who take out cash out of a checking account are spending it somehow, some way, going out to eat, buying stuff, maybe taking a trip somewhere, and it’s really gone. It’s not invested somewhere to where you can say, oh, he bought this or she bought that, and now we can sell it. There’s probably nothing sellable to actually get back.

Jaime: So more likely than not, it’s just gone.

Robert: It’s gone. Right. And I’ll give an example. If someone is in the construction business, they take out cash out of the bank account every now and then. As a forensic accountant, I would say, okay, who are you paying, the contractor or what are you buying the stuff from? And he’ll say, oh, I bought some wood at the local Lowe’s. There’s no way that I would know if that’s true or not. It’s just not. That’s just the way it works. Cash is in many ways, it’s untraceable, and it can be difficult.

Jaime: Yeah, I have to have that tough talk with my clients sometime when they tell me that their husband has a mainly cash business and they want to be able to try to track that down. And I’m like, well, if there’s not a document to prove it, I don’t know that we’re going to be able to do that.

Robert: Well, that is true, but on the revenue side of things, let’s just talk about the revenue side of things. If you have a small business owner, like a bar or a restaurant, right. There should be some type of receipts that give you a general idea of the volume of dollars that are coming into the business even though it’s not deposited. Okay. Now, the expenses for a restaurant, there may be a few things here and there, but for the most part, we are coming away from a cash society and into the debit card world to where I have cash in my pocket, but not as much as I did five years ago. It’s a lot easier to just tap that machine and be done with it, which makes my life as a prince account a lot easier. It really does.

Jaime: So many things large and small, as you know, are contested when spouses begin dividing up their property. How do you differentiate between marital and nonmarital assets?

Robert: Well, for the most part, attorneys would probably say, and I’m not a lawyer. You’re the lawyer. I’m not the lawyer that whatever the marriage received or earned or the assets that were purchased during the marriage is the marriage assets, whether it’s in his name or her name. Let’s just face it, it’s all one big pot. What I have seen is there are times where and then we consider that marital property. What I have seen would consider non marital property is property that was brought into the marriage beforehand. Like, maybe you had a small business that you own, or maybe you had a car or a house or a vacation house and that type of thing before you got into the marriage. I think the courts, and I’m not a lawyer, would say that’d be non marital property, which means that was there before the marriage happened. So therefore there’s going to be some type of consideration that it was there beforehand. So it’s not really part of the split.

Jaime: Yeah. We run into issues a lot where someone has come into the marriage with a certain amount of money, and they make the mistake of putting it in a jointly titled bank account, and money is going in and out of the bank account. And then as the lawyer, we need to figure out, okay, is any of this premarital separate money left in this account, or is it now all marital because of all the ins and outs and the transactions that have occurred?

Robert: Do you use the first in, first out method on that? $1,000 is marital, but anything after that, so whatever’s blast is maybe still the guy’s money from 20 years ago.

Jaime: It depends on the case. I’ve heard it both ways. Sometimes we use first in, first out. Sometimes we use last in, first out. I really don’t know that there is a general consensus on which one is right per se.

Robert: That’s the reason why you make the big bucks and the lawyers make and the judges make the big bucks determination. Because every lawyer says, well, it depends, right? That’s the answer. It depends.

Jaime:It’s all gray.

Robert: Yeah.

Jaime: Well, after you have provided your findings to an attorney in a divorce case, what happens next?

Robert: In my situations that I’ve experienced, once I look at the documents, I can give the attorney who really, frankly, is my client, even though their client pays the bill, I give them my assessment and where they may need to look further, because many times I don’t get everything. It’s just part of the job. I understand. People say, oh, you got everything. No, I look through it. I’m missing half of it because months may be missing, the counts may be missing. So I have to go back and forth, back and forth, back and forth. And then after a while, you get a pretty good idea of the picture, and I give an opinion about the attorney. Listen, this is what I’m seeing. It’s reasonable or not reasonable, or there could be some something down the road down here. Is this where you want to go? And they’ll talk to the client to figure out it’s kind of like choosing on a venture whether or not they want to spend more money to go down that road. That may lead to the pot of gold at the end of the rainbow, or it could be a dead end. I don’t know the answer to that. And it’s just a matter of risk mitigation. What do you want to do? I’ve had a situation where there was millions of dollars involved, and there was money was just missing, and it was going overseas. Well, finding money overseas is just difficult, especially if you’re a lawyer in a state court system, and now you got money over in Swiss banks. Well, there may be some money out there. How are we going to get this thing done? And so do we need to bring in even more professionals who are specializing in international marital assets? So that type of thing is what I would recommend to them. And at the end of the day, if I have enough evidence to prove that one spouse is not being fully honest, then most of the time it settles out of court. But if it needs to happen, then I can testify in court about what I found and that the judge can make the determination, then.

Jaime: I’m glad you brought up the offshore accounts. I have clients often tell me that they think that their spouse has an account, an offshore account somewhere. If they suspect that, as the lawyer, what should I do?

Robert: Well, first of all, I’d ask, why do you think that is, and where is the source of that? Where do you think the money came from? Did it come from his business operations? Did it come from his employment? Did it come from old family money? Where do you think? In many cases, there is some type of offshore account. There is some type of wire. There’s something out there that goes from point A to point B that at least we can point to and say, okay, that’s where you think the most money is. I would ask the client, do you have any assets offshore? Do you have any family that’s overseas? Why would he be doing this? And we would kind of dig down a little bit to figure out, is there really money out there? In some cases, you got these multimillionaire billionaire cases. Yeah, there’s probably money out there. And then you’ll have to bring in some type of professional to get international assets. There’s a whole new podcast on that one. But the point being is that you got to find out if there’s any reasonableness other than just a hunch. Got you. I’ve seen it once or twice. He’s got money overseas. When I look at the account, he transferred $5,000 to his mama out in Pakistan. All right. Do you really think that you want to spend more money trying to chase down this $5,000 that really, frankly, you get half, right? So it’s $2,500. I don’t think it’s worth your while. Sometimes you’d have to cut your losses and just go on in life. That’s just the way it is sometime in law.

Jaime: Yeah, that’s a great point. And you mentioned doing the cost benefit of hiring a forensic accountant to assist with your case. What is the typical cost for a forensic accountant?

Robert: My rates are $300 an hour. It depends on the level of complexity, and it depends on what you’re really looking for. For the most part, when I’m hired, it’s really a peace of mind for the spouse to think, I think he’s got money out there. And I’ll tell him, Listen, I don’t know the answer yes or no. All I can do is look at the documents. But if you give me 10 hours, $3,000 10 hours, I will look at what you got, and I’ll tell you what my assessment is, and then you can decide whether or not you want to go further down the road. But I’m not going to sell you something on things that’s not true. So I can get it. With my experience, I can look for 10 hours, look at someone’s documents, and say whether or not there’s something out there, if it’s reasonable or unreasonable, and then get some good guidance, and then they can determine whether or not they want to go down this road and hire me to go down further. But for a couple thousand dollars, in my mind, it gives them peace of mind, because now they know, all right, I had a forensic expert look at it. They don’t see anything. I’m going to go forward in life versus spending six months of agony going, I know he’s got money out there. I know he’s got money out you know how it is. People lose sleep over this stuff and they’ll spend themselves in circles. And I was like, listen, for $3,000, at the end of the day, you can have an answer and rest at night knowing that you did the best you could, and this is where it’s at versus worrying about it and threatening over it.

Jaime: That’s a great point. If you could only share one piece of advice with someone going through a divorce, what would it be.

Robert: Going through divorce can be very contentious. The biggest thing that I see is hire an attorney that understand your situation. Also understand that there is a value to a good attorney and a good forensic accountant, because, listen, if you’re splitting $20,000 worth of assets, it’s not really worth the hassle of trying to split this stuff up. But let’s assume that there’s a split and there’s a half a million dollars at play or a million dollars at play. Well, the way I look at it, I tell them, listen, my clients, I tell them, listen, at the end of the day, you’re going to be worth, let’s say, a million dollars. Would you rather be worth $980,000 and really know you had a full, complete picture of everything than just take the million? And sometimes they take the million, sometimes like, no, you know what? There may be other millions out there. I’ll spend the extra $20,000 to figure this thing out, but just realize that there’s a cost benefit to all this. And if someone is going through divorce, I hate it for them. But the biggest thing I can tell them is to go hire a good attorney, go hire a good forensic accountant who has some tax background in my opinion, because they can actually help because many times in these divorces, maybe go a little bit off tangent here. Many times in divorces there is financial problems, which is one of the problems of divorce, right? It’s financial problems. And if there is a financial problem going on, there’s probably some tax problems. And if there’s some tax problems going on, the IRS is going to step in and say, both of you owe taxes, not just one or the other, even though one earned the money and earned the taxes, but yet the other one’s now liable for it, which causes a lot of pain because the IRS doesn’t care what your divorce agreement is. They want their pound of flesh and they’re going to go after both parties and so making sure that that party that you’re representing doesn’t come back six months later and get bitten in the rear end because we didn’t look at all sides of divorce to make sure this client’s okay, when it’s finally split up.

Jaime: So that is a question I get a lot. Is there any recourse if you’re the spouse who didn’t run the business, didn’t really have any knowledge about what was going on with the taxes, is there anything that person can do?

Robert: Yes there is in my opinion, hired professional to do it. If we’re talking about $5,000, I wouldn’t worry too much about it. It’s not going to be worth a while. But if you’re talking 50, 100 thousand dollars bills, it’s going to be worth the while. And CPAs or enrolled agents or attorneys who are qualified in this can help out the rules by the IRS. This is kind of interesting. What makes the IRS so dangerous is because congress creates the law. And then congress says, all right, IRS, you have the authority to enforce the tax law, collect the taxes, and, by the way, you can make your own rules up while you do it, which causes a headache, because if they screw up, well, we got to deal with it, because they can make their own rules. So you have to figure out what the rules they abide by. But they can change it. They want to change it, but it’s caveat. Whatever it’s necessary to do the job, we can do it. Okay, fine. And so there are some rules out there called the innocent spouse or injured spouse that can assist in this situation to where you have to articulate once again, it’s not a set formula, but you have to persuade the IRS that you are truly innocent. You didn’t know what’s going on. It wasn’t household help. It wasn’t your business. Maybe there’s some type of abuse, physical abuse that you add to really a three ring binder to prove that you really were a victim in all this and kind of persuade the IRS to let the debt go by. Now, what happens in that situation is that the other spouse is going to be notified that you are doing this because what you’re doing is you’re taking one bill instead of splitting among two parties. Now you’re taking the one bill and claim it’s only one person’s fault. Well, that one person also has a right to come in and say, no, it’s a joint liability. So just realize that there is a lot of persuasion, a lot of back and forth. Now, there is some secrecy where if there’s an injured spouse or an innocent spouse and there’s some abuse, they’re not going to turn over the names and addresses of the injured spouse, of course, but there’s going to be a conversation a professional will have to articulate why this debt should not be paid by this one spouse. So there is remedies out there.

Jaime: In your experience, how often are people successful pursuing innocent or injured spouse relief?

Robert: Not very good. And the reason why I say that is because you can’t just put your head in the sand and say, oh, I’m an innocent spouse. I’ll give an example. Let’s assume your spouse makes $200,000 a year on their package, right? And the wife it’s typical. The wife is to stay at home, takes care of the kids, may have a small job here and there, but she knows that that tax return says she signed. The tax return says 50. Well, the IRS is going to step in going, there is no way you’re living in this house with this car, with this lifestyle and making 50. It’s not reasonable for you to be this way. You got to know something. Then the burden of proof is back on us as professionals to sit there and say, well, she was forced to sign it because of Duress or whatever else it is, but is it reasonable for someone to live that lifestyle and not know about the income? That’s really what it comes down to. And so that’s another thing too. And you also have to prove that you signed the tax return, or maybe the tax return was falsified. That’s not my signature. Well, then as a professional, I have to sit there and say, listen, this is how her signature looks like. This is not her signature. Blah, blah, blah, blah, blah, blah, blah. We kind of paint the whole picture. It’s not really just one or two things. It’s really the big picture that they’ll look into. But a lot of times I hate to say this, but spouses put their head in the sand. Isn’t that a fight? I want to fight today. I’ll sign it. And they go on and they do it for many years and then. The IRS steps in and says, oh, you owe us a lot of money. And the spouse says, well, it’s not really my money. Yeah, but you knew, or you had to know. A reasonable person had to know. We have to go back to the education. Or you have a fifth grade education, don’t speak English, or you have a doctor’s degree in accounting. You have a doctor’s degree in accounting. Forget it. But if you’re fifth grade mail order bride, right, you probably have more of a leg to stand on. So they’ll look at the education level as well of the individual.

Jaime: So really it sounds like it’s just a totality of the circumstances and whether or not it’s reasonable that you didn’t know.

Robert: Correct. But they don’t just take a look at one or two things and look at the big picture.

Jaime: Got you. Well, Robert, if one of our listeners is looking for help from you and their divorce, what’s the best way to get in touch with you?

Robert: I have a website, it’s called Nordlanderscpa.com that they can go to. I will let them know that if they are going through a divorce, their first conversation should be with their attorney, and then the attorney then have a conversation with me afterwards with their attorney. I do not have attorney client privilege when someone talks to me, but if I’m hired by the attorney, I would have attorney client privilege. So anything that’s said, anything that’s discovered that may be against that spouse, at least we are covered to where they don’t say something to me that ultimately I end up being a witness to. So the best thing to do is they can go to Nordlanderscpa.com, find out information about me. My address and phone number and emails are on that website. But the first conversation need to have is with attorney first and request a forensic accountant. And then if they want to talk to me, we can talk. But typically I’m hired by the attorney because of that privilege.

Jamie: Well, thank you, Robert, for joining me. This has been great.

Robert: Well, thank you, Jamie. I appreciate it. It’s good being with you.

Jaime: Thanks, Robert, for joining us, and thank you for listening. If you like this episode, be sure to follow the show wherever you get your podcast so you don’t miss the next one. While the information presented is intended to provide you with general information to navigate divorce without destruction, this podcast is not legal advice. This information is specific to the law in North Carolina. If you have any questions, before taking action, consult an attorney who is licensed in your state.