The importance of obtaining a debtor’s tax return when trying to locate assets has been discussed in print by experts on the subject at length. Tax returns truly are treasure troves of information. But the importance of the tax return is in what it contains, and what to look for; the skilled financial crime professional must first be sure they are looking at the debtor’s real tax return. Phony returns are as old as the tax code and anyone willing to skip out on debt is a prime candidate for having more than one set of returns.
As a former law enforcement officer and tax prosecutor, I have encountered countless situations where the tax return that is filed with the IRS is much different than the copy of the return that was given to the bank when the debtor was applying for a car loan. Having two different tax returns is a crime. File the false return with the tax authorities and you are guilty of a felony crime. Provide a copy of fraudulent return to a lender and you are guilty of bank fraud.
Conventional wisdom says that folks will want to minimize their income when paying taxes but maximize their income when applying for credit. And it is pretty easy to create a third set of returns when ordered by a court to provide tax returns to a creditor.
Verifying tax returns a key step
How can you be sure the tax return you are reviewing is accurate? First, obtain a copy of the return directly from the debtor. If there is a false return floating around, the one you obtain directly from the judgment debtor is most likely the false one. Once you have that return, obtain a copy directly from the IRS. Anyone can obtain a copy of the actual return directly from the IRS. The fee is $57 per year and the IRS maintains the current year and 6 years prior.
To obtain the return, you need to complete IRS Form 4506 and have the taxpayer (judgment debtor) sign. Complete the form so that the returns are sent directly to you. (IRS transcripts ar free but there is more value in having a copy of the signed return.)
If the debtor refuses to sign, the act alone is a huge red flag suggesting the return already in your possession is false. Should the debtor refuse to sign the release form, a court can order the debtor to sign. Once, in Illinois a debtor was so adamant about not signing that the court appointed a receiver for the limited purpose of signing the IRS document request form. Magically, the case settled immediately. We will never know what was on those returns but the debtor suddenly could not pay fast enough.
Finally, tax return copies can be obtained by subpoena from any lender doing business with the debtor. Unless the debtor pays cash for everything, most people have car loans, mortgages, consumer loans and credit cards. If there is a debt, there is probably a loan application complete with tax return copies in the lender’s possession.
Extra work is worth the effort
Is this extra work necessary? If dealing with a fraudster, yes. Fraudsters are like rats. They hide from light. Shining a spotlight on multiple versions of the same return usually prompts meaningful settlement offers and exposes the fraudster to criminal prosecution. More importantly, it helps us identify hidden assets and bank accounts. Many times I have found brokerage accounts and the like on the real return that were conveniently omitted from the “copy” provided to me directly by the judgment debtor. And once a judge discovers the debtor is playing games, the courts are more likely to utilize their creativity and vast contempt power to see justice done.
Brian Mahany, Principal and founder of MahanyLaw with offices in Portland, Milwaukee and satellite offices in Palm Beach and Los Angeles. Contact him firstname.lastname@example.org or call directly at (414)704-6731.