In this episode, Plano attorney Thomas Greenwald interviews Bryan Rice, a Weatherford CPA with 30 years of experience and 20 years in forensic accounting. Bryan shares crucial information for any party working through a divorce regarding separate property and accounting services. Bryan Rice provides insight on selecting the correct specialization of CPA with respect to your individual case.

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Transcript

Tom:
This is the “Family Law Advisor” podcast. I’m Tom Greenwald. My guest today is Bryan Rice. Bryan’s been a CPA for 30 years, and he’s been doing forensic work for the last 20 years. Bryan, welcome to the “Family Law Advisor” podcast. We’re thrilled to have you today.

Bryan:
Thank you very much.

Tom:
So, Bryan, first thing we’d like to talk about today is when someone talks about a CPA and then they start talking about a forensic accountant, what is the distinction between those two?

Bryan:
Well, a CPA is somebody who has a license issued by the applicable State Board of Public Accountancy to perform public accounting services, and a forensic accountant is just a CPA who has experience in that area and performs those types of tasks on a routine basis. Other examples of what CPA specialties are would be a federal income tax preparation and representation, or another one would be somebody who does audits of financial statements. But a forensic accountant is really just a specialty of a CPA, a subspecialty, so to speak.

Tom:
Do all CPAs necessarily do forensic work?

Bryan:
No, a lot of CPAs do not do forensic work, especially ones who are involved in, say, auditing financial statements, or performing reviews of financial statements, or compiling financial statements, or doing tax work. But some of those activities do involve a degree of forensic accounting.

Tom:
So, if I’m involved in a divorce case and I am considering hiring a forensic accountant, what type of work could I ask the forensic accountant to do for me? Why would I hire a forensic accountant?

Bryan:
So, typically, one would hire a forensic accountant if they were concerned about things that had happened in the past that they were…perhaps they knew that their spouse had received a bonus from their employer but the spouse really never told them about what was done with it. And so, the forensic accountant might go back and simply find where the bonus was deposited and then what was done with it. So, it could be something that simple. It could also turn into something very complex such as, say, a person inherited money during a marriage, maybe, say, 10 years ago, and that money would, in community property states like Texas, pretty much be that person’s separate property at the time. But if that money was put in an account with other money and kind of mixed together, then a forensic accountant could assist in determining how much of that separate property still exists in that account today.

Tom:
Is that referred to as tracing?

Bryan:
Exactly.

Tom:
Any other reasons why I might consider hiring a forensic accountant?

Bryan:
Well, a forensic accountant could do other things. For example, if one was concerned about tax returns, the way tax returns have been filed…there’s a lot of spouses who will just go have a tax return prepared or prepare it themselves and then just shove it in front of their spouse on the day it’s due and say, “Sign this,” and it’s all good. But a forensic accountant could then go back and review the prior year returns to see if the items reported on the tax return were actually legitimate, true, and correct, and supported by documentation. So, in a way, that is a type of forensic accounting, but it is somewhat also basic just like my initial example was.

Tom:
What about valuation work? Would a forensic accountant help one in valuing…let’s say if someone had a business interest or if they had particular financial assets like stock options, things of that nature?

Bryan:
Yeah. So, a forensic accountant could do those tasks. Now, when we’re talking about doing an appraisal of a closely held business, that is also somewhat of a specialty in and of itself, and the CPA or perhaps financial professional would perform during the valuation some forensic accounting procedures.

A great example of that is sometimes a spouse would use money directly out of their company, say, for a non-legitimate purpose like to pay for expenses for a paramour but record those expenses as a legitimate expense or maybe even their salary. So, in appraising the business, we would go back through the books and records of the business and determine if any of that had happened. And if it had, we would eliminate that expense item in the calculation of the economic benefits that the business produces. And the economic benefits that the business produces is what drives value.

So, for example, if the business was reporting a net income of $100,000 a year but there was $50,000 that were really not expenses that the company paid for, then we would actually say the business was producing $150,000 a year of net profit. [inaudible 00:05:44] where we’re using a four-times multiple on the net income, that would result in a $600,000 value as opposed to a four-times multiple on the $100,000, which would be a $400,000 value. So, valuation and forensic accounting at times overlap. There are times when, say, we’re appraising a business and we have absolutely no concerns about the legitimacy of the financial statements. And so, in that instance, we really don’t have to employ many forensic accounting procedures.

Tom:
Another topic I wanted to touch on today is I’ve had situations where a client comes to me and the client may say, “I think that my spouse has committed tax fraud.” And I’ll often ask them, “Well, did you sign the return, or did you agree that the accountant could file on your behalf?” and that sort of thing. And oftentimes, the spouse will say, “Well, yeah, I did.” Or I’ll ask, “Well, if you were not in agreement with the way your spouse filed the taxes, did you file an individual tax return on your own?” right? I mean, if you’re saying two years ago, your spouse filed a joint return that you didn’t agree with, in that situation, if that was truly the case then, two years ago, would you expect that spouse that’s claiming today that that was a fraudulent return to have filed their own return?

Bryan:
Yes, that’s a great question and brings up a lot of issues. One very common misconception is, is that if people are married, they have to file a married filing joint return, when in fact, the default form of filing for federal income taxes is married filing separate. Filing a married filing joint return is considered an election for tax purposes. So, be very careful in signing a joint tax return because you, the signer, the ostensibly innocent spouse, and we’ll talk about that in a minute, does have full liability for all of the tax liability on that return and any future liability on that tax return as a result of audits, including penalties and interest. So, that means that there is no division of the tax liability, 50/50 or in some other proportion. If one person cannot pay, then the IRS will go after the other person even if they’re no longer married but had filed a joint tax return for a previous year. But yes, signing a tax return is something that should not be taken lightly and both persons signing it should do so and consider their personal responsibility and determining whether that tax return was done correctly.

Now, I understand that in a lot of marriages, there’s a person who’s the “financial manager” or has a better knowledge of financial things going on in the marriage, and sometimes one person starts trusting that person a little too much, and the person who’s being trusted starts to see that and starts maybe taking advantage of things. Even though that can be the case, the person who’s somewhat at a disadvantage should still make every effort to ask for the supporting documents for the tax return, look at them, and then if they’re having a CPA prepare the return, they can call the CPA and start asking questions, and the CPA has a duty to talk to them, even though they may have never talked to the CPA before. They have the right to ask the CPA if they feel that everything on the return is legitimate and appropriate.

So, there’s a lot of ways to accomplish protecting yourself. There’s a lot of ways to protect yourself. And, you know, if, in fact, a person did sign a tax return and it’s later audited, and money is owed, and the spouse who was more involved in the preparation of the return has no money, and then the IRS goes after the other person, the other person can perhaps file for what’s called innocent spouse relief. But that is not the easiest kind of relief to get. You have to show that, for example, maybe you had no knowledge and no reason to know that the tax return was not filed properly, you have no education or sophistication in those matters, but most importantly that you, the person claiming innocent spouse relief, did not in any way benefit from the understated taxes. And that is extremely difficult to show.And sometimes the IRS will grant, say, partial innocent spouse relief. For example, if there was, say, $300,000 a tax that you wanna return, they can assign a percentage of it to one spouse and the rest to the other spouse. But, you know, just, say, 20% of that was assigned to the person requesting innocent spouse, I mean, that’s still $60,000. Could be a lot of money for somebody. So, proceed with extreme caution in filing a joint tax return.

Tom:
So, in that same scenario, let’s say I decided to go ahead and file a separate return, married filing separate, and the liability on my separate return is only $5,000, and my spouse files a separate return, and the liability on her separate return is also $5,000. And in that situation, I’m limited to just the $5,000 that’s on my return, I pay that, and let’s say my spouse doesn’t pay her $5,000, you’re saying the IRS will not come to me and try and collect the $5,000 that she owed on her return?

Bryan:
That’s correct. As long as the married filing separate returns were done properly…and the more likely scenario there, we were talking about a $10,000 total tax liability in the married filing joint situation, you know, then in the married filing separate, each person being responsible for $5,000. Married filing separate does come at a little bit of a cost. The rates are a tad higher than for married filing jointly. So, it may be that if the two returns were on a married filing separate basis, each person would have $6,000. And that’s why there’s always one spouse asking the other spouse to do married filing jointly because it results in a lower tax. But, myself, I would rather be only responsible…side to tax on the two married filing separate returns with $6,000 each. I would rather be only responsible for $6,000 than for $10,000.

Tom:
Next issue has to do with an account that prepares a married filing joint return. And like you said, in the situation…I’ve had this come up with clients, they never even talk to the CPA. And now we’re in the middle of a divorce case and the same CPA has prepared their tax returns for the last five or six years. So, is it your position that if my client contacts the CPA, that that CPA ethically has an obligation to provide my client with copies of their file or copies of their tax return? How does that work?

Bryan:
That’s not only my position, it is the position of the Texas State Board of Public Accountancy and the American Institute of Certified Public Accountants, and it’s the position of the IRS. The IRS has its own ethical standards called Circular 230. And the CPA who practices before the IRS has to follow that, and the CPA who has a license in Texas has to follow the rules of the State Board of Public Accountancy, and the CPA who’s a member of the AICPA has to also follow their rules. So, the CPA who prepares a joint return represents both clients evenly, and cannot favor either client, and must comply with all the requests to turn over the files and to respond to all the inquiries.

The person in that situation who has never met their CPA, you know, is simply advised to give them a call, introduce themselves, say, “I’d like to come by and meet with you. I’d like to talk to you. And, ultimately, I’m gonna wanna see some of my documents.” So, you can’t necessarily demand that you get it right then and there, but the CPA in question has a right to take a little time to pull the files, and make the copies, and, you know, charge you a normal copying cost. But the CPA cannot advocate for either client.The interesting thing there, say, I have tax clients who are married and I’ve been doing their tax returns for years, if then that couple decided to get divorced and one of them asked me to say, “Well, hey, Bryan, you know, I’ve had this separate property inheritance for a long time. I would like to hire you to trace it in my divorce,” I would have to decline the engagement because I’d be potentially acting in an adverse manner to my own client, which is strictly prohibited.

Tom:
Well, Bryan, wanted to thank you for being here today.

Bryan:
Very welcome.

Tom:
And I know that we’ve only scratched the surface. There are so many topics, so many more questions I wanna ask you. In some of the things we’ve even talked about today, we could dig much deeper, and I’d like to do that someday.

Bryan: 
Definitely.

Tom:
So, if you will commit to coming back and talking to us again, we’ll cut you loose for today. How does that sound?

Bryan:
Sounds great. It’d be my pleasure.

Tom:
Great. Thank you.

Bryan:
You’re welcome.