By Robert Parker, CPA, MBA, Manager
From the time I began working for Ron J. Anfuso CPA/ABV, An Accountancy Corporation, Ron stressed the importance of his accountants performing tax returns. Having now completed several hundred returns, many of which involve substantial assets and major tax complications, I have come to realize that having up-to-date knowledge of both forensic accounting and the current tax code have enabled me to become a much more effective investigator.
What I will share with you here is an actual case whereby having completed numerous tax returns equipped me with the ability to uncover a discrepancy that most forensic accountants with little or no tax accounting experience probably would have missed. Actually, this is just one of several cases where a thorough knowledge of the current tax code has helped me unmask red flags.
Proctor Versus Proctor
Joseph and Elizabeth Proctor married in September 2010.* Joseph is a chiropractor and Elizabeth served as his office manager. Husband owned four businesses, which included the chiropractic office, a juice bar, a fitness center, and a rehab facility, where he partnered with a medical doctor.
The couple filed for divorce in 2016. They had one child and a family home Elizabeth wished to keep. Wife was willing to swap the home for the businesses, believing the businesses were about equal in value. The opposing forensic accountant wanted to push for a settlement believing the businesses had no value over the most recent two-year period. Although the businesses’ credit card purchases seemed to support this claim, Elizabeth was certain the businesses were profitable during that two-year period and was willing to go to trial. Therefore, we chose to expand our investigation.
I followed the standard steps of analysis, which included studying the numbers and making inquiries. Through these efforts, I discovered that the Proctors had remodeled their home, and Joseph claimed the remodel as business expenses, which distorted the value of the businesses. Had I not studied and evaluated the returns, we may not have known where to look to validate the numbers.
As it turned out, there were several home-remodel expenditures that Joseph categorized as business expenses on his corporate returns. To make the deception more complicated to detect, these expenses were spread over Joseph’s four businesses. The remodeling expenditures, which were not mentioned in the parties’ personal tax return, were categorized in the corporate returns as medical equipment, medical machines and, medical supplies. The total amount wrongly charged to the businesses was $300,589. Joseph’s attorney and accountant were completely unaware of this tax fraud until we presented it to them.
The case had been set to go to trial. However, in an attempt to avoid litigation, the court ruled the accountants to meet and confer and seek an amiable agreement. Our expectation is our client will avoid trial and enjoy a much more favorable outcome as a result of our investigation.
We intend to present the outcome of this case in a revised edition of this article in the newsletter section of our website once this case has settled.(http://www.anfusocpa.com/forensic-accounting-newsletters/)