The divorce process, while already emotionally challenging, often becomes even more complex when it comes to dividing marital assets and debts. In Texas, one of the most crucial aspects of this process is ensuring that all assets and their accurate value are disclosed in order to ensure that both parties receive a fair share of the marital estate. However, divorcing spouses may not always play nice and be forthcoming about all of their assets and income, and this is where forensic accounting and tracing can play a vital role.
Forensic accounting is the use of accounting techniques to investigate financial issues, and tracing refers to the process of tracking the origin and movement of funds, assets, or property. These tools are most frequently used when there is a large, complex marital estate, when there are concerns about asset concealment or fraud, or when there are disagreements about the value, nature, or division of marital property.
What is Forensic Accounting?
Forensic accounting focuses on investigating and analyzing financial records to uncover discrepancies, hidden assets, and other irregularities that may affect a property division. A forensic accountant examines income, expenses, bank records, tax returns, business valuations, and other financial documents to identify any financial wrongdoing or issues that might influence property division.
Forensic accountants often play a key role when there are suspicions of a spouse hiding assets, underreporting income, or intentionally devaluing or undervaluing property. They can also help determine the fair market value of property, such as businesses, real estate, and investments in large marital estates.
What is Tracing?
Tracing is the process of identifying and tracking the source of assets and funds. This is important because Texas law distinguishes between community property and separate property. Community property refers to assets and income acquired during the marriage and is generally divided equally between the spouses upon divorce. Separate property includes assets acquired before the marriage, as well as gifts or inheritances received by one spouse during the marriage, and the court cannot divide these assets—they go wholly to the spouse who owns them.
In some cases, the division of property may be complicated by the mixing of community and separate property, also referred to as the commingling of funds. Tracing helps clarify the origin and ownership of specific assets, ensuring that separate property is not mistakenly treated as community property. For example, tracing can be used to prove that funds used to purchase a property were from a spouse's savings from before the marriage. Because those funds were saved prior to the marriage, they are separate property, and anything purchased using them becomes separate property as well.
When is Forensic Accounting and Tracing Used in Family Law Cases?
Forensic accounting and tracing are typically used in family law cases involving the following:
- Asset Concealment: One spouse may attempt to hide assets or income to avoid sharing them in the divorce. Forensic accountants can uncover hidden bank accounts, real estate, offshore accounts, and other assets.
- Business and Real Property Valuation: When one or both spouses own a business or real property, a forensic accountant can help determine the value, taking into account factors such as assets, liabilities, and potential tax implications.
- Tracing Separate Property: In cases where spouses claim that certain assets should be considered separate property, tracing can help establish whether those assets are truly separate.
- Financial Mismanagement or Fraud: If there are allegations of financial mismanagement or fraud during the marriage, forensic accountants can investigate and provide reports to support or refute these claims.
- Income Disputes: If one spouse is underreporting or hiding sources of income, forensic accountants can analyze tax returns, bank statements, and other financial records to uncover the full scope of a spouse’s earnings.
- Dividing Complex Assets: High-net-worth divorces or those involving complex financial portfolios (real estate, investments, pensions, retirement accounts, etc.) often require forensic accounting to ensure an equitable division of assets.
Conclusion
The role of forensic accounting and tracing can be essential in Texas divorces with property disputes for ensuring that financial matters are handled with accuracy, fairness, and transparency. Whether uncovering hidden assets, valuing a business, or tracing the origin of specific funds, forensic accountants help level the playing field in divorce proceedings and property disputes. These professionals can ensure that all assets are accounted for and that each spouse receives a fair division of property based on a full and accurate financial picture.