It’s called the skim, creaming sales, unreported cash receipts, pocketing income, cash going south.
Whatever you call it, concealing income to evade taxes is a major headache for investigators in matrimonial and fraud matters.
Here are 10 steps fraud examiners use to find concealed income:
1. Interview (usually the spouse) about possible hidden income or assets.
2. Inspect financial statements and income tax returns. Search for unusual variances between years.
3. Analyze profit of the company versus industry profit.
4. Compare expenses on the financial affidavit to income tax returns.
5. Inspect deposit tickets and bank statements for cash versus checks being deposited.
6. Prepare a bank statement analysis to determine that total deposits equate to reported income on a cash basis tax return.
7. Examine the personal checkbook for checks payable to “cash” and for lack of payment for food, clothing, vacations, etc.
8. Interview terminated or disgruntled employees.
9. Obtain mortgage applications and personal financial statements issued to banks.
10. Prepare a statement reflecting the sources of funds versus the expenditure of funds for possible unreported income.
The owner of several bagel stores, a totally cash business, reported sales of $180,000 for the year, with a profit of $4,800 and a salary to himself of $9,000.
An interview with his wife found the couple went to dinner at exclusive restaurants and spent large sums of cash for mortgage payments, vacations, clothing, tuition, jewelry, etc. Each week, the husband brought home $2,000 in cash.
When interviewed, the husband said he was working terribly hard and not making enough money for his time and effort. He said the profit was below normal because of the high cost of labor, purchases for flour and equipment.
How was the concealed income found? All bagel flour purchase invoices were reviewed. Industry sources revealed that 100 pounds of flour produces approximately 45 dozen bagels. Multiplying the number of bagels produced by a selling price of 35 cents per bagel, total cash receipts were determined.
It was discovered that receipts were $303,000 per year, $123,000 more than he had reported for tax purposes.