Income Reconstruction Services in Houston
Income reconstruction services are used for tax accounting purposes and instances where it is essential to calculate a taxpaying entity’s income. There are many instances where income reconstruction services are useful, including
- Tax audits (state and federal)
- Tax preparation services
- Criminal investigations (such as fraud investigations)
- Contract disputes
- Divorce proceedings
- Shareholder disputes
- Bankruptcy proceedings
- Insurance claims
- Business valuations
- Estate planning purposes
Income reconstruction services have a role in litigation and business accounting as well. Depending on what it’s needed for, income reconstruction may rely on forensic accounting techniques to accurately calculate the target’s income.
When are Income Reconstruction Services Needed?
Income reconstruction is an important consideration in many legal and business contexts. Some of its most common applications include:
Tax audit preparedness – Income reconstruction services may be used during tax preparation to precisely calculate an individual’s or business’s tax obligations and liabilities. They are especially helpful when a client hasn’t kept organized financial records, or when these records have been lost or damaged. Businesses that have rapidly and recently scaled up their operations may need to reconstruct income to ensure ongoing tax compliance.
Fraud investigations – Income reconstruction services can be used to uncover irregularities in income reporting, which may be needed to support criminal fraud investigations.
Divorce proceedings – Income reconstruction services are sometimes necessary to accurately calculate one of the (former) spouses’ income for the purposes of determining asset division, child support or alimony. Forensic accounting methods may be required to discover potentially hidden assets during a marriage dissolution case.
Business valuations – Income reconstruction services may be requested for a business valuation. As example is during a merger and acquisition (M&A), where the acquiring organization may use income reconstruction to make operational and personnel decisions before finalizing the M&A. Investors may also request income reconstruction services to accurately assess a company’s profit potential prior to investing in the organization.
Bankruptcy cases – Income reconstruction services can be used to determine when a taxpaying entity was insolvent for the purposes of timing a bankruptcy case and debt discharging. Income reconstruction can also detect fraudulent transfers, which bankruptcy filers may attempt to hide assets and avoid paying back creditors.
Insurance claims – Income reconstruction services may be used in conjunction with business insurance claims to determine the potential value of a claim. For example, income reconstruction can determine lost income due to business interruptions arising from disasters or acts of God.
Estate planning – Income reconstruction services may be necessary when valuing an estate for tax purposes. Income reconstruction may also be requested by a court or the estate’s beneficiaries if there are disputes between heirs regarding asset or estate value.
How Do Forensic Accountants Perform Income Reconstruction Services?
Income reconstruction services may be recommended for individuals or businesses, and they may be requested by the taxpayer or used by another party to reconstruct the taxpayer’s income. Depending on the circumstances, income reconstruction services may include the following accounting techniques:
Reviewing bank deposits and statements – If detailed income records aren’t available, but bank statements are, the account’s deposit history will be used to help calculate income.
Net worth calculations – If a taxpayer’s expense history indicates a level of income beyond the taxpayer’s means, or if there has been a recent, difficult-to-explain increase in net worth, any expenses beyond the taxpayer’s reported income may be treated as unreported income. This is most relevant during fraud investigation cases, where circumstantial evidence (like making several large purchases in a short time) may be the impetus for reconstructing the taxpayer’s income.
Funds sourcing and application – If income and expenditure information is available, but that information doesn’t make sense when matched up together, an accountant may compare income sources and outlays to discover potentially unreported income.
Profit margin calculations (or unit-margin methods) – Used for retail, manufacturing or other inventory-carrying businesses, profit margin calculations involve comparing a company’s cost of production (per unit) to an industry standard profit margin. This is an effective approach when detailed sales records aren’t available or aren’t well-organized, but inventory records are.
Comparative method – During comparative analysis, an accountant will benchmark the taxpayer’s income against other businesses in the same industry or operating region. If there are significant differences between the benchmarked company and other similar businesses, this may be used as evidence of unreported income.
This is only a small subset of techniques and methods available to forensic accountants that provide income reconstruction services.
A Forensic Accountant Can Provide Expert Income Reconstruction Services
Income reconstruction is a valuable accounting tool for a variety of legal, financial or business applications. These services are useful for tax preparation and compliance, divorce cases, fraud investigations, bankruptcy cases, major business transactions, and for estate planning purposes.
There are many instances where precise income calculations are necessary, and there are various ways that accounting experts can determine this income. When you need a clear picture of a taxpaying entity’s income, an experienced forensic accountant can provide the necessary expertise.
