There are many people just like you, who have negligently or intentionally falsified information on their income tax returns. Every one of them has this one thing in common: they are in trouble with the IRS and looking for experienced, caring, professional help. Reading below you will learn how the IRS ferrets out fraudulent returns and you will learn what can be done about it to protect yourself.
We start with the Internal Revenue Manual. The Internal Revenue Manual is the official “Bible” of the IRS tax auditor. Usually the tax auditor is a Revenue Officer – highly skilled, highly trained accountants and CPAs who know how to spot serious problems which the ordinary examiner might pass over. When it comes to tax fraud, the Internal Revenue Manual provides examiners with information and techniques designed to assist the auditor in detecting and recognizing indicators of tax fraud reflected on a return. (IRM 184.108.40.206.2).
Most often the Revenue Officers find themselves reviewing situations where the taxpayer has omitted or understated taxable income. While this is not very creative it too often is the notion that comes into the mind of the taxpayer who has decided to cheat. Unfortunately for this group of people, the discovery of this kind of fraud is not at all difficult.
The Internal Revenue Manual provides examiners with a laundry-list of the most common badges of fraud:
IRS Indicators of Tax Fraud
Listed below are examples of fraud indicators. The following lists are not all-inclusive and are only indicative of the types of actions taxpayers may take to deceive or defraud.
- Indicators of Fraud – Income
- Omissions of specific items where similar items are included.
- Omissions of entire sources of income.
- Unexplained failure to report substantial amounts of income determined to
have been received.
- Substantial unexplained increases in net worth, especially over a period of years.
- Substantial excess of personal expenditures over available resources.
- Bank deposits from unexplained sources substantially exceeding reported income.
- Concealment of bank accounts, brokerage accounts, and other property.
- Inadequate explanation for dealing in large sums of currency, or the unexplained expenditure of currency.
- Consistent concealment of unexplained currency, especially in a business not
calling for large amounts of cash.
- Failure to deposit receipts to business account, contrary to normal practices.
- Failure to file a return, especially for a period of several years although
substantial amounts of taxable income were received.
- Cashing checks representing income at check cashing services and banks other than the taxpayer’s.
- Covering up sources of receipts by false description of source of disclosed income, and/or nontaxable receipts.
- Indicators of Fraud – Expenses or Deductions
- Substantial overstatement of deductions.
- Substantial amounts of personal expenditures deducted as business expenses.
- Claiming fictitious deductions.
- Dependency exemption claimed for nonexistent, deceased, or self-supporting
- Loans of trust funds disguised as purchases or deductions.
- Indicators of Fraud – Books and Records
- Keeping two sets of books or no books.
- False entries or alterations made on the books and records, backdated or post dated documents, false invoices, false applications, statements, other false documents, or applications.
- Invoices are irregularly numbered, unnumbered or altered.
- Checks made payable to third parties are endorsed back to the taxpayer. Checks made payable to vendors and other business payees are cashed by the taxpayer.
- Failure to keep adequate records, concealment of records, or refusal to make
certain records available.
- Variances between treatment of questionable items on the return as compared
- Intentional under or over footing of columns in journal or ledger.
- Amounts on return not in agreement with amounts in books.
- Amounts posted to ledger accounts not in agreement with source books or records.
- Journalizing of questionable items out of correct account.
- Recording income items in suspense or asset accounts.
- False receipts to donors by exempt organizations.
- Indicators of Fraud – Allocations of Income
- Distribution of profits to fictitious partners.
- Inclusion of income or deductions in the return of a related taxpayer, when
difference in tax rates is a factor.
- Indicators of Fraud – Conduct of Taxpayer
- False statement about a material fact involved in the examination.
- Attempts to hinder the examination. For example, failure to answer pertinent
questions, repeated cancellations of appointments, refusal to provide records,
threatening potential witnesses, including the examiner or assaulting the examiner.
- Failure to follow the advice of accountant or attorney.
- Failure to make full disclosure of relevant facts to the accountant.
- The taxpayer’s knowledge of taxes and business practices where numerous
questionable items appear on the returns.
- Testimony of employees concerning irregular business practices by the
- Destruction of books and records, especially if just after examination was
- Transfer of assets for purposes of concealment, or diversion of funds and/or
assets by officials or trustees.
- Patterns of consistent failure over several years to report income fully.
- Proof that the return was incorrect to such an extent and in respect to items of such character and magnitude as to compel the conclusion that the falsity was known and deliberate.
- Payment of improper expenses by or for officials or trustees.
- Willful and intentional failure to execute pension plan amendments
- Backdating of applications and related documents.
- Making false statements on TE/GE determination letter applications.
- Use of false social security numbers.
- Submission of false Form W-4.
- Submitting a false affidavit.
- Attempts to bribe the examiner.
- Indicators of Fraud – Methods of Concealment
- Inadequacy of consideration.
- Insolvency of transferor.
- Assets placed in other’s names.
- Transfer of all or nearly all of debtors property.
- Close relationship between parties to the transfer.
- Transfer made in anticipation of a tax assessment or while the investigation of a deficiency is pending.
- Reservation of any interest in the property transferred.
- Transaction not in the usual course of business.
- Retention of possession.
- Transactions surrounded by secrecy.
- False entries in books of transferor or transferee.
- Unusual disposition of the consideration received for the property.
- Use of secret bank accounts for income.
- Deposits into bank accounts under nominee names.
- Conduct of business transactions in false names.
We have found that while one or two of these indicators of fraud won’t automatically mean the taxpayer will be charged with a crime, the presence of these indicators will mean that the return will be probed much more thoroughly than otherwise. Here’s how the IRS works in such cases. Let’s say an indicator of fraud has been found. The agent then meets with his or her group manager and they together confer with a “fraud coordinator” about the likelihood of fraud in the return. If the agent discovers a firm indication of fraud during the course of an audit, the examiner is required to immediately suspend the audit without disclosing the reason for the termination to the taxpayer or the taxpayer’s representative.
Now a discussion ensues among the threesome to determine whether a criminal referral is appropriate. If the conclusion is reached that a criminal referral should be made, a Form 2797 will issue and it will enable the Criminal Investigation Division to determine the criminal potential of the case. This sudden suspension of an audit is reason enough to immediately contact Andrew Gordon, Tax Fraud Defence Lawyer, and tell him about your situation.
Likewise, if you get an audit letter and you know that you have committed fraud then you need a lawyer to help you at the very beginning and all the way through.
Experience counts in law
“You literally saved my life,” said one man for whom a prison sentence would have meant certain death. “I wouldn’t have seen my children again for 25 years,” said another man whose charges were extremely serious. “Thank you for saving my business,” countless other clients have said, happy to retain their businesses and business interests after their cases were resolved. “I would have lost my job and maybe my family if I couldn’t continue in my work,” said one woman.
Contact us to schedule a confidential consultation with an experienced tax fraud attorney. As this tax law firm represents individuals and business and is always pleased to meet with you, please call us at 312-471-0126 to discuss your situation in detail.
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