What Is The Difference Between Tax Fraud And A Simple Mistake?

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In most tax audits the IRS is only interested in collecting the taxes owed, plus interest along with a few penalties. Perhaps the IRS might impose a negligence penalty or a late filing penalty. However, if during the tax audit the IRS suspects that you have committed tax fraud they can impose a civil tax fraud penalty. The civil tax fraud penalty is equal to 75% of the tax owed, plus interest on the penalty. Worse yet the IRS tax auditor might ask the tax fraud referral specialist to look at your case to see if it should be sent to the IRS Criminal Investigation Division (CID) for criminal tax prosecution.

 

Tax crimes include filing a false tax return, tax evasion, filing false documents, failure to collect employment taxes, failure to pay taxes, and failing to file a tax return. The penalties for criminal tax fraud are very serious. They range up to 5 years in jail, plus fines of up to $500,000, plus the costs of prosecution for each separate tax crime. Once the criminal tax case is completed CID will refer the case back to the IRS Examination Division where the taxes will be assessed, and the IRS can be expected to add on the civil tax fraud penalty, on top of any criminal tax fraud fines.

 

Generally tax fraud or tax evasion involves an intentional wrongdoing. Mere carelessness is not tax fraud. “Badges Of Fraud” commonly used by taxpayers to deceive or defraud the IRS include the following:

Badges 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.
  • Covering up sources of receipts by false description of source of
    disclosed income and/or nontaxable receipts.
  • Substantial overstatement of deductions.
  • Substantial amounts of personal expenditure deducted as business expenses.
  • Claiming fictitious deductions.
  • Dependency exemption claimed for non-existent, deceased, or
    self-supporting persons.
  • Loans of trust funds disguised as purchases or deductions.
  • Keeping two sets of books or no books.
  • False entries or alterations made on the books and records; backdated or
    postdated documents; false invoices, applications, or statements, other false
    documents, or applications.
  • Failure to keep adequate records, concealment of records, or refusal to
    make certain records available.
  • Variances between treatments of questionable items on the return as
    compared with books.
  • 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 amount.
  • False receipts to donors by exempt organizations.
  • 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.
  • False statement, especially if made under oath, about a material fact
    involved in the examination.
  • Attempts to hinder the examination. For example, failure to answer
    pertinent questions, repeated cancellations of appointments, or refusal to
    provide records.
  • The taxpayer’s knowledge of taxes and business practice where numerous
    questionable items appear on the returns.
  • Testimony of employees concerning irregular business practices by the
    taxpayer.
  • Destruction of books and records, especially if just after examination was
    started.
  • 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 the return was incorrect to such an extent and in respect to items
    of such character and magnitude as to compel the conclusion the falsity was
    known and deliberate.
  • Payment of improper expenses by or for officials or trustees.
  • Willful and intentional failure to execute plan amendments.
  • Backdating of applications and related documents.
  • Making false statements on EP/EO determination letter applications.
  • Use of false social security numbers.
  • Submission of false Form W-4.
  • Submitting a false affidavit.
  • Attempts to bribe the examiner.
  • Inadequacy of consideration.
  • Insolvency of transferor.
  • Assets placed in other 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.

 Badges of Fraud – Expenses or Deductions

  • Substantial overstatement of deductions.
  • Substantial amounts of personal expenditure deducted as business expenses.
  • Claiming fictitious deductions.
  • Dependency exemption claimed for non-existent, deceased, or
    self-supporting persons.
  • Loans of trust funds disguised as purchases or deductions.

 Badges 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
    postdated documents; false invoices, applications, or statements, other false
    documents, or applications.
  • Failure to keep adequate records, concealment of records, or refusal to
    make certain records available.
  • Variances between treatments of questionable items on the return as
    compared with books.
  • 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 amount.
  • False receipts to donors by exempt organizations.

Badges 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.

Badges of Fraud – Conduct of Taxpayer

  • False statement, especially if made under oath, about a material fact
    involved in the examination.
  • Attempts to hinder the examination. For example, failure to answer
    pertinent questions, repeated cancellations of appointments, or refusal to
    provide records.
  • The taxpayer’s knowledge of taxes and business practice where numerous
    questionable items appear on the returns.
  • Testimony of employees concerning irregular business practices by the
    taxpayer.
  • Destruction of books and records, especially if just after examination was
    started.
  • 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 the return was incorrect to such an extent and in respect to items
    of such character and magnitude as to compel the conclusion the falsity was
    known and deliberate.
  • Payment of improper expenses by or for officials or trustees.
  • Willful and intentional failure to execute plan amendments.
  • Backdating of applications and related documents.
  • Making false statements on EP/EO determination letter applications.
  • Use of false social security numbers.
  • Submission of false Form W-4.
  • Submitting a false affidavit.
  • Attempts to bribe the examiner.

Badges of Fraud – Methods of Concealment

  • Inadequacy of consideration.
  • Insolvency of transferor.
  • Assets placed in other 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.

Whether and when to answer questions from the IRS, or whether to stand on your 5th Amendment rights, are questions that only a tax fraud lawyer can help you answer. Your financial well being, as well as your personal freedom may depend on the right answers. If you or your accountant even suspects that you might be subject to a criminal or civil tax fraud penalty, the experienced tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and San Diego and elsewhere in California can determine how to respond to these inquiries and formulate an effective strategy.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

Badges of Fraud: What Sets the Alarms Off at the IRS?

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A new client once came to me saying she had made an error in preparing her tax return and inadvertently took a deduction to which she was not entitled. “Will I go to jail if I’m audited?” The answer of course, is no. If that were the case, you might as well surround the country in barbed wire and imprison all of us. After all, I’m sure almost everyone in this country has made an error or misunderstood a tax law and claimed a deduction they shouldn’t have or failed to report some income because the reporting document got lost in the mail or misplaced.

But some taxpayers go too far. Their tax returns read like a fiction novel. Therefore, IRS auditors have been trained to spot the hot issues which usually are present with dishonest taxpayers.  These hot issues are called by the IRS as the “Badges Of Fraud” which could result in your case being referred to the IRS Criminal Investigation Division (CID).

 The Badges Of Fraud include:

  • understatements of income;
  • inadequate records;
  • failure to file tax returns;
  • implausible or inconsistent explanations of behavior;
  • concealment of assets;
  • failure to cooperate with tax authorities;
  • engaging in illegal activities;
  • attempting to conceal illegal activities;
  • dealing in cash; and
  • failure to make estimated tax payments.

If you have any of these tax problems and you are audited by the IRS you may need to engage a tax fraud attorney. Actions you take during the course of a tax audit can turn a run of the mill tax controversy into a tax fraud case. For example, lying or giving evasive answers to IRS investigators, delaying tactics, and other actions designed to mislead IRS agents are all indicia of tax fraud.

The penalties for criminal tax fraud are very serious. They range up to 5 years in jail, plus fines of up to $500,000, plus the costs of prosecution for each separate tax crime. Once the criminal tax case is completed CID will refer the case back to the IRS Examination Division where the taxes will be assessed, and the IRS can be expected to add on the civil tax fraud penalty, on top of any criminal tax fraud fines.

Whether and when to answer questions from the IRS, or whether to stand on your 5th Amendment rights, are questions that only a tax fraud lawyer can help you answer. Your financial well being, as well as your personal freedom may depend on the right answers. If you or your accountant even suspects that you might be subject to a criminal or civil tax fraud penalty, the experienced tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and San Diego and elsewhere in California can determine how to respond to these inquiries and formulate an effective strategy.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

What An IRS Agent In A Civil Tax Audit Considers Before Referring You For Criminal Investigation

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IRS auditors are trained to spot common types of deception and attempts to defraud the Federal government. Any of these acts are called “Badges Of Fraud”. Now the IRS in an audit expects to find a few errors on a tax return and I would agree that a little bit of fudging here or there is not going to send a taxpayer to jail—it might not even raise an eyebrow. But during the course of the audit, errors will be corrected, deductions will be disallowed, unreported income added, and a new tax liability will arise possibly including a few penalties as well as interest.

 

But some taxpayers go too far. Their tax returns read like a fiction novel. Therefore, IRS auditors have been trained to spot hot issues common with of dishonest taxpayers.  Here are the major Badges Of Fraud auditors look for during the course of an examination:

Unreported Income.

When it comes to income, the auditor asks for all of your bank statements from all accounts. The auditor will match bank deposits to income declared on the tax return. If you have bank deposits from unexplained sources, you can be sure that the auditor will question this. The auditor will also look for concealment of bank accounts, brokerage accounts and other property. The auditor will also check for an excess of personal expenditures. For example, if you are spending $100,000 per year and only making $50,000 per year, the auditor will believe you are omitting an entire income stream from your tax return. The auditor will also check out internal information compiled by other departments of the IRS such as the IRS department which organizes data received from foreign banks to detect whether you have unreported foreign bank accounts.

Overstated Deductions.

If you fudge in the area of expenses or deductions, it could be explained as simply making a best estimate rather than totaling receipts. But if there is a substantial overstatement of deductions, it will set off alarms. Some taxpayers attempt to deduct personal expenses as business expenses or claim fictitious deductions. This will only cause an auditor to dig deeper and possibly want to open other tax years for examination.

Self-Employed Taxpayers.

If you are self-employed, the auditor may cut the audit short if you keep a good set of books on a computerized software system or a set of books maintained by an outside bookkeeping service or accounting firm. But if you do not keep books, or the auditor discovers that you are keeping two sets of books, you will subject yourself to more scrutiny.  Other badges of fraud in this area include false entries, backdated or postdated documents and false invoices. And of course if you refuse to make records available or if your books and records don’t match income and expenses reported on the tax return you will send up a red flag. The auditor will also check for improper allocations of income. For example, a distribution of profits to fictitious partners or shareholders, or including your income or deductions in the return of a related taxpayer to optimize your own tax liability.

Questionable Transfers Of Assets.

Auditors also look for the transfer of assets for purposes of concealment or diversion of funds and/or assets by officials or trustees. They can tap into public records and your State’s Department Of Motor Vehicles (DMV) in order to discover assets you may attempt to hide.

Social Media.

Auditors have also been known to look at your activity on social media websites like Facebook and Twitter to gather information on your lifestyle and major transactions like vacations, jewelry and extravagant social celebrations which they will incorporate in a cost-of-living analysis to determine if you under-reported your income.

The penalties for criminal tax fraud are very serious. They range up to 5 years in jail, plus fines of up to $500,000, plus the costs of prosecution for each separate tax crime. Once the criminal tax case is completed CID will refer the case back to the IRS Examination Division where the taxes will be assessed, and the IRS can be expected to add on the civil tax fraud penalty, on top of any criminal tax fraud fines.

Whether and when to answer questions from the IRS, or whether to stand on your 5th Amendment rights, are questions that only a tax fraud lawyer can help you answer. Your financial well being, as well as your personal freedom may depend on the right answers. If you or your accountant even suspects that you might be subject to a criminal or civil tax fraud penalty, the experienced tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and San Diego and elsewhere in California can determine how to respond to these inquiries and formulate an effective strategy.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

Tales From An X-IRS Agent

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It is usually impossible to get the inside scoop of how the IRS is looking at taxpayers but sometimes a retired IRS agent will provide me with some valuable insight.

Before I go into this, let’s cover some of the basics about the structure of the IRS. Generally, there are four classes of employees at the IRS. 

The Office Examiner is the person who audits personal income tax returns which can include the small Schedule Cs-the sole proprietor.  This person usually does not have a degree in accounting.  These audits are performed at the IRS office. 

The Revenue Agent will have a degree in accounting and is the person who audits large Schedule C’s and corporate income tax returns.  These audits are performed at the business. 

The Revenue Officer is the person who collects past due tax accounts.  These are the people who will give you a bad time, and they can have the worst attitudes.  When they wanted to make the IRS kinder and gentler, these are the people they wanted to tame down.  However, there are cases that involve some real big crooks, and the actions that the Revenue Officer takes are justifiable. 

Then, there are the Special Agents who work in the Criminal Investigation Division (CID) handle the fraud and criminal cases.  These are the people who pack the heaters (guns, shotguns, and rifles).  These are the kind, sympathetic, and understanding people that you will meet in the event that you are ever found to be significantly cheating on your taxes.  You see, by going after you, making a public case out of you (newspapers, radio and TV), and by putting you in jail, they can assist in the government’s goal of voluntary compliance with the tax laws.

How A Routine Audit On Excise Taxes Turned Into A Nightmare For The Taxpayer-Business Owner.

The Revenue Agent was assigned a case where a company that was manufacturing truck parts was turned in by one of its competitors.  The competitor suspected that the company was not paying the excise tax that is due on truck parts since this company was winning most of the government bids to supply the military.  The excise tax on the parts, tires and fuel is used to maintain the Federal roads.

The Revenue Agent pulled copies of the returns from the IRS and sure enough, no tax was being reported or paid. While at the company’s place of business, the Revenue Agent noticed that one of the owners had a picture of an airplane on his wall.  Since there is also an annual excise tax on small airplanes, the Revenue Agent decided to test this business owner.  So the Revenue Agent got him into a conversation about how much he loved his airplane and then the Revenue Agent asked him for copies of the excise tax returns for the plane.  The business owner acted dumb, like he didn’t know anything about it.  So the Revenue Agent gave him blank forms to fill out for the last three years. 

After receiving the completed forms, the Revenue Agent checked what tax returns were filed by the business owners and what was reported on those tax returns. Well what the Revenue Agent found was that one of the business owners had never filed personal income tax returns for the last five years.  The Revenue Agent was then able to show that the business owner committed tax fraud through his intentional disregard for the law.

This case was then transferred to the CID where it did go to a criminal trial. Besides having to deal with a criminal tax proceeding, the non-compliant business owner who didn’t file his five years of tax returns suffered more misfortune as his wife divorced him and he lost total custody of his kids.  He and his business partner still owed $250,000 in taxes plus significant penalties and interest, to the IRS.

Abuse Of The Travel & Entertainment Deduction.

Some companies like to spend large amounts on travel and entertainment and, in some industries, it is necessary.  The Revenue Agent was assigned a case where, for the size of the company, the Travel & Entertainment (T&E) expense seemed a little high.  As the Revenue Agent got into the audit, he realized that there was only one salesman-the owner-and his T&E expenses per year amounted to $250,000.

As the Revenue Agent started going through the receipts for the expenses, he noticed some interesting things. The Revenue Agent noticed receipts for mink coats, wash machines, and TV’s.  The Revenue Agent asked the outside CPA about these items and he said that they were for corporate gifts to clients.  Now the Internal Revenue Code limits gifts to $25.00 per person, per year but these were a little higher than that.  The Revenue Agent asked the accountant what the purpose of these gifts were and he said that this was the only way that the company could get the buyers’ in the retail chains to purchase the company’s products.  What the Revenue Agent was able to show was that these items were corporate bribes and payoffs to purchasing agents.  The retail chain purchasing agents were on the take.  The items were for their wives and their own homes.

Needless to say, the Revenue Agent disallowed 50% of the company’s T&E expenses due to a lack of documentation and excessive gifts for the three most recent years.

The Wedding And The Boat.

Sometimes a Revenue Agent goes out to a company and on the surface of the tax return and financial statements everything looks just normal.  But, on occasion, the unusual just jumps out at you.

In one audit the Revenue Agent following standard audit procedures came across an entry in the books for about $80,000 that looked a little unusual, so the agent checked it off and asked for the documentation.

When the Revenue Agent returned to complete the audit, the CPA sat down with the agent to go over the list of items that the agent had requested.  When the agent came down to the $80,000 item, the CPA explained to the agent that it was for the owner’s daughter’s wedding and that since the owner HAD TO invite his customers to the wedding that some or all of it was a business expense.  Now some people will try to justify anything; however, the average Joe out there can’t take a tax deduction for inviting fellow employees to his daughter’s wedding. Needless to say, the taxpayer didn’t get the deduction.

Again, sometimes when things look normal, they aren’t.  In another audit the Revenue Agent stumbled on an entry hidden in Cost Of Goods Sold (CGS).  The CGS is where material, labor and related product costs are supposed to be recorded.  So what is the total cost of a 45 foot yacht doing there?

The explanation given to the Revenue Agent was: “Oh, no!  We didn’t mean for that to happen.  Alice the bookkeeper entered that to the wrong account, and it slipped by us.”  So the agent said “I suppose that she should have buried it in another account”.  While there is a provision in the law for the use of a boat as a travel and entertainment expense, expensing a whole boat in one year just doesn’t work. Again, needless to say, the taxpayer didn’t get the deduction.

It Just Doesn’t Add Up.

The Revenue Agent was assigned to audit a small retail store.  Upon going through the books and records, the agent could not get the deposits on the books to balance to the tax return and neither could the accountant.

The agent asked the accountant to prepare a cost of living analysis for the owner and the business.  Congress has given the IRS the authority to prove the income of the taxpayer.  This is a simple task.  All deposits to your bank accounts are income unless you can prove otherwise.  However, if all of the income does not get deposited, then the second method of proving income is a cost of living analysis.  In that case, your income is equal to your cost of living unless you can prove otherwise.

Well, the cost of living analysis showed $100,000 more per year of income than what had been reported on the tax return.  Now the accountant and business owner were nervous!  The Revenue Agent then sent the case for a fraud review and the IRS authorized the taxpayer to be charged with a Civil Fraud Penalty amounting to 75% of the increase in income tax.

What Should You Do?

If you receive notice that your tax returns are to be audited or there is a knock on your door by IRS Special Agents, do not try and take this matter on your own. Instead, enlist the services of a qualified tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Diego, San Francisco and elsewhere in California to resolve these inquiries.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

Three Common Myths About The Dreaded IRS Tax Audit

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Filing taxes is punishment enough without the vague threat of an IRS audit looming over our heads. For understandable reasons, the IRS insists on keeping the ins and outs of its auditing process on the murky side. After all how will the IRS catch the bad guys if you give them the rule book first? 

But because of the sense of mystery around the process, it’s an area of regulation often misunderstood by taxpayers. 

Here are a few common myths about the dreaded tax audit: 

Myth #1: Only the wealthy get audited.

While it’s true that big businesses and the uber-rich are often targets of IRS tax probes, that doesn’t necessarily mean low- and middle-income workers are free and clear. The IRS is increasingly relying on data mining and robo-audit systems to detect errors in tax returns, which has actually made it easier to go after small-fish taxpayers. 

In 2013, the IRS audited more than 6.5 million taxpayers with an adjusted gross income of less than $1 million. And it audited fewer than 40,000 of those reporting $1 million or more. 

One of the biggest reasons behind that discrepancy is that it just takes fewer resources to audit low- and middle-income earners than to audit high-income earners. For example, the IRS has effectively moved to pursue people who fraudulently claim the Earned Income Tax Credit (EITC), a juicy tax break worth an average $5,891 for a family of five earning less than $50,270 a year.  In 2012 alone, EITC fraud cost the government between $11.6 billion and $13.6 billion. 

Myth #2:  An audit means you’ll have an IRS agent knocking down your door. 

Of the 6.5 million audits conducted last year, only 362,500, or 5.5%, resulted in an actual field visit. If your return is flagged, you’ll most likely get a letter in the mail notifying you that your tax return has been selected for examination or seeking additional information. From there, you can either answer by return mail or call them directly.

Now when IRS agents do come knocking on your door, they usually are Special Agents from the Criminal Investigation Division. Here there is no civil tax audit. These are the agents with guns and badges who seek out taxpayers that the IRS believes should be charged with tax crimes and prosecuted. Don’t be fooled by their civility. Refrain from communicating with them until you first seek tax counsel.

Myth #3: I’ve got my tax refund so I don’t have to worry about an audit. 

Even if your tax return was accepted and you cashed your refund check, you’re still fair game for auditors. The IRS actually has up to three years to go after questionable tax returns and in some cases this can be extended to six years or indefinitely.

The IRS uses a special matching system that tracks each taxpayer’s W-2s, 1099s and 1040 forms. If it turns out that you’ve under-reported your income, the system will eventually catch up to you. 

The IRS will also “score” your tax return adding points for the tax credits and deductions you claim including the Home Office Deduction, Real Estate Activity Losses, Unreimbursed Employee Business Expenses, Charitable Contributions and Business Expenses for the Self-Employed. The more you claim, the higher your score and the chance you are selected for audit.

And that’s not even the worst part. Any interest and penalties owed on your unpaid taxes will start accruing the day your taxes were due — not two years later when the IRS letter finally shows up in your mailbox. Two years of compounding interest and penalty charges will only add salt to the wound. 

What Should You Do?

If you receive notice that your tax returns are to be audited or there is a knock on your door by IRS Special Agents, do not try and take this matter on your own. Instead, enlist the services of a qualified tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Diego, San Francisco and elsewhere in California to resolve these inquiries.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

IRS Traps Gentlemen’s Club Owner Who Filed False Tax Returns And Maintained Two Sets Of Books.

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You can’t have it both ways. More than one small business owner has either underreported his income or overstated his business expenses in order to save on income taxes. But that can come back to haunt them when they go to sell the business. While not universally true, most buyers base their offer on the cash flow from the business. Low income means a low selling price. That was the situation in this case. The big difference was the buyers were undercover IRS agents.

John M. Potter owned and operated a “gentlemen’s club” called Potter’s Pub, Inc. Potter’s Pub was a cash-based business that derived receipts from food and drink charges run through the cash register, door cover charges, juke box moneys, pool table receipts, and moneys paid to the pub by the dancers for the privilege of “dancing”. Mr. Potter was the president and sole owner. For each year at issue he filed, and signed as president, a Form 1120, U.S. Corporation Income Tax Return, for Potter’s Pub. Those returns reported losses for 2002 and 2003 and zero taxable income for 2004 and 2005. Mr. Potter’s individual income tax returns for the years at issue reported no wages, dividends, or other income from Potter’s Pub on the returns.

In December 2006 IRS Special Agents engaged in an undercover investigation of Potter’s Pub posing as buyers interested in acquiring the business. Mr. Potter assured the undercover agents that Potter’s Pub was much more profitable than it appeared. He explained that he deposited in the corporate account only enough of the business revenues to cover its expenses and that he wired the balance of its revenues to his personal bank account in Florida. These wire transfers were structured in amounts less than $10,000 to avoid reporting obligations by the bank to the IRS. In reality, Mr. Potter told the undercover agents, Potter’s Pub grossed more than $1 million annually and he took home between $400,000 and $520,000 each year. He showed the agents clandestine sales ledgers for 2003 and 2004 that supported the gross receipts he claimed, acknowledging that it might have been unwise to maintain documentary evidence of his skimming.

During a subsequent search of Potter’s Pub, IRS Special Agents seized upwards of $200,000 in cash and obtained the set of clandestine sales ledgers that tracked its daily receipts. These ledgers confirmed that Potter’s Pub’s annual receipts for 2002 to 2005 were vastly in excess of the amounts that Mr. Potter had reported to the IRS. The difference between its actual gross receipts and the gross receipts reported on the company’s Forms 1120 for those years exceeded $2 million.

In January 2009 Mr. Potter was criminally charged with eight counts under Section 7206(1) and (2) for making and subscribing false tax returns, and for assisting in the preparation of false tax returns, for himself and Potter’s Pub. In May 2009 he pleaded guilty to one count of making and subscribing a false Form 1120 on behalf of Potter’s Pub for 2002. Pursuant to his plea, he was sentenced to 18 months’ prison time and supervised release for one year. He was also ordered to pay restitution of $400,000.

Don’t think the case above could happen to you? In a case some years ago a taxpayer was selling his business and divulged the second set of books to the buyer. At some point the buyer had a falling out with the seller and reported him to the IRS.

One of the dangers of filing false returns, other than the obvious one of problems with the IRS (and the applicable state), is that how you deal with other parties who are interested in your financial position. For example, you’re going for a bank loan for your business, or a home mortgage, a car loan, or, as in this case, you’re trying to sell your business. If you present financials that conflict with your tax return you run the risk being accused of defrauding the lender or buyer. Worse, the financials presented to the bank can be used as evidence of fraudulent intent with respect to the tax returns.

Already filed returns which can be considered fraudulent? The sooner you hire tax counsel experienced in criminal tax matters, the higher the chance that further escalation of your case in the criminal arena could be avoided or limited.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.

How To Stay Out Of Jail: Lessons To Learn From The “Queen Of IRS Tax Fraud”

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Crime doesn’t pay. Despite using money from crime to temporarily fund a lavish lifestyle, Rashia Wilson of Tampa, Florida, learned her lesson the hard way before a Federal District Court Judge in July 2013 when she was sentenced to 21 years of prison for Tax Fraud and Weapons Charges. She is also ordered to pay restitution of more than $3 million. At the time of sentencing she was just 27. When she is released, her children, currently all in elementary school, will all have graduated from high school. Her youngest child will be 23.

While Wilson was briefly able to cash in on her crimes before landing a record prison sentence, the details of her spree read like a “What Not To Do” map when stealing from the government. If you’re one of those folks pondering how best to stay out of jail, here are a few tips:

1. Don’t steal. That should be obvious but clearly, it’s not. Stealing from the government – in particular, identity theft – is on the rise and as a result, the IRS put identity theft resulting in tax fraud at the top of its list. In the scheme, thieves like Wilson access your personal information including your name, address and Social Security number to fraudulently file a tax return and claim a refund without your consent. Wilson gleaned much of the information she used to file fraudulent returns from medical records: in addition to printouts of medical records, investigators found thousands of ID numbers at her home.

In order to combat this level of fraud, the IRS now has 3,000 people working on identity theft related cases, more than twice the number from two years ago. So they’re watching you. If, on the other hand, you believe you are at risk of identity theft due to lost or stolen personal information, contact the IRS Identity Protection Specialized Unit at 800-908-4490.

2. If you did steal, don’t talk about it. Wilson had a big mouth. She liked to talk about herself and her money. She also liked to throw it around. She used the millions she stole from others to finance a showy lifestyle, including $30,000 on her 1-year-old’s birthday party, and $90,000 on a 2013 Audi (which she bought using a money order). She wanted to show off. And that’s exactly how she caught the eye of investigators. Her behavior prompted U.S. District Judge James. S. Moody Jr. to remark at her sentencing, “She knew what she was doing was wrong. She reveled in the fact that it was wrong.”

3. If you did steal, don’t expect your privacy settings on Facebook or use of a fake name to protect you. I don’t care what you think you know about privacy settings, when you put something out there on Twitter or on Facebook, it’s not protected. As a taxpayer, that means you should avoid posting personally identifying information like tax ID numbers and your address (the IRS Facebook page won’t allow you to post comments for that reason). And you should certainly avoid posting photos of yourself surrounded by stacks of cash with such gems as:

I’m Rashia, the queen of IRS tax fraud. … I’m a millionaire for the record. So if you think that indicting me will be easy, it won’t. I promise you. I won’t do no time, dumb b——.

In additional when you sign up for Facebook, the terms of use indicate that “Facebook users provide their real names and information” and you agree that “you will not provide any false personal information on Facebook.” Apparently, this is about the only rule that Wilson followed. She used her real name to create a personal page on Facebook where she regularly bragged that she couldn’t be arrested and teased the police, posting entries like:

I’M RASHIA, THE QUEEN OF IRS TAX FRAUD… I’m a millionaire for the record, so if U think indicting me will B easy it won’t, I promise you! U need more than black and white to hold me down N that’s to da rat who went N told, as if 1st lady don’t have da TPD under her spell. I run Tampa right now.

Granted, that feels like it’s written in code but if you can fumble your way through it, you get the gist. And yes, in case you’re wondering, Wilson isn’t college educated. Or high school educated. Or even middle school educated. She failed the 5th and 6th grades and that’s as far as she got. A lack of punctuation and, heck, let’s face it, actual consonants and vowels, didn’t hold her back from blasting authority figures on Facebook. Turns out, they were paying attention.

Investigators worked for two years to gather evidence against Wilson and a host of other fraudsters as part of Operation Rainmaker so dubbed because of the amount of money that was raining down. Included in that group was Wilson’s boyfriend, Maurice “Thirst” Larry, and a friend, Marterrence “Quat” Holloway.

4. Don’t assume that your luck won’t run out. Born into poverty to a coke addict and a father in prison, Wilson quickly glommed on to a life of crime. She dropped out of school in the 7th grade. Since then, she has been arrested 40 times and held felony convictions for grand theft and burglary, but never did any time in a state prison. She came to believe that her streak would continue, bragging to practically everyone that she would never do any time. That streak ended July 2013.

5. Hire tax counsel now. The sooner you hire tax counsel experienced in criminal tax matters, the higher the chance that further escalation of your case in the criminal arena could be avoided or limited.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.

IRS Trolling Social Media Looking For Tax Evaders

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Thanks to Big Data analysis and digital information-gathering tactics, the IRS employs a more watchful eye than ever especially with the fiscal challenges faced by the Federal government, the pressure for the IRS to recover lost revenue has never been higher. Conveniently enough, the IRS has made massive investments in its computing power and tools for crunching big data, allowing for more automation and rapid analysis. That means a greater capacity for robo-audits and less room for honest mistakes.

The IRS is reportedly using data from social media on people who file fishy-seeming taxes or don’t file at all. The IRS loses roughly $300 billion per year to tax evasion; and in times of budget cuts, with a smaller staff, the agency has allegedly turned to both data mining and data crunching.

In its quest to find and audit tax dodgers, the IRS is said to use online activity trackers to sift through the mass amounts of data available on the Internet. This data is then added to the information the agency already has on people, such as Social Security numbers, health records, banking statements and property rolls.

But the IRS efficiency in catching tax evaders is not just from an improvement in the tools it uses but also from the fact that the data itself is richer and more varied than ever, drawing increasingly from whatever details about our digital lives the IRS can get its hands on, including information that isn’t publicly accessible.

In an April 2013 U.S. Senate Hearing, Senator Chuck Grassley (Iowa, Republican) asked Steven Miller, the IRS’ then acting commissioner, whether the IRS obtained a search warrant before reading private Facebook or Twitter messages. The Senator didn’t get an answer.

We don’t know the full extent of the IRS’s data-mining capabilities, but recent reporting has revealed new details. 

1. Analyzing Your Social Media Updates 

The social Web has been a boon for IRS investigators, who can use updates from Facebook, Twitter and other services to bolster its cases against alleged tax cheats. Information about work history, one’s physical whereabouts and even purchases can be gleaned from social networks. Some of it, like tweets and certain details from Facebook, are public. But should the IRS want to take a closer look, it supposedly has the means to do so, with or without a warrant. 

According to recent reports, the IRS cross-references data from social networks with Social Security numbers and then works in a host of other private data to look for suspicious patterns. 

the IRS is using online activity trackers to mine through massive amounts of data on sites like Facebook, Instagram and Twitter to look at photos and other updates that might offer a glimpse into vacations, home and car purchases and other goodies.

Facebook, Instagram, and Twitter have all become places where people post intimate details about their lives: vacation photos, work successes, buying a new house, car, or other cool stuff.

However, this information is also up for grabs by the Internal Revenue Service. So a word of advice: THINK BEFORE YOU POST. After all, do you really want IRS to like your Facebook update or be your newest Twitter follower?

2. Monitoring Digital Payments and Credit Card Activity 

The rise of commerce and digital payments has also given the IRS new sets of data to mine and analyze. The agency has long looked at taxpayers’ activity on ecommerce sites like EBay, but are now going deeper and getting a look at credit card transactions and other online payments. 

The IRS looks for potential auditing targets by matching tax filings to social media or electronic payments. The exact mechanism of this monitoring isn’t publicly known (lest they tip off tax cheats) but it is widely believed that it includes examining credit card transactions for the first time ever. And if the IRS feels it has cause to take a peek at your online payment data, it won’t have a problem doing so. 

3. Peeking At Your Email Usage 

While as of April 2013 the IRS said it would abandon its controversial policy that claimed the right to read taxpayers’ e-mail without first obtaining a search warrant, the IRS did not make the same commitment for other private electronic communications including when and how the IRS looks at email usage.

The IRS’ big data analysis tools are used in part for “tracking individual Internet addresses and emailing patterns.” That’s pretty vague. In theory, the IRS could glean some details about email usage simply by looking at browsing activity, whether that insight comes from an ISP or email service provider. 

Does that mean that the IRS has blanket access to everybody’s Gmail account for the purpose of feeding its data-crunching behemoth? That seems pretty unlikely. Instead, what the IRS likely does is to get a search warrant to access individual accounts for people who are already suspected of wrongdoing. It usually is easy for the IRS to be granted a search warrant and the taxpayer is not required not receives any notice that a search warrant was issued.

Conclusion

Of course, these days everyone from Google to Nike is cobbling our data together to create profiles of us.

Still, it’s different when the IRS does it. If Nike is analyzing your information, the worst consequence is that they market stuff to you that you don’t want and it’s annoying. However, if the IRS does it, the worst consequence is there could be legal ramifications, whether it’s fines, penalties or imprisonment. Which is why the sooner you hire tax counsel experienced in criminal tax matters, the higher the chance that further escalation of your case in the criminal arena could be avoided or limited.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.

What Tax Crimes Can The IRS Charge You With?

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Unlike a civil tax examination, a criminal tax investigation has little to do with the assessment of additional tax. The purposes of a criminal investigation are (1) to detect suspected criminal tax offenses and (2) to refer those offenses for criminal prosecution. The government’s goal is to obtain a conviction that results in imprisonment, fines, and/or restitution.

Tax Evasion


This is a particularly broad, catch-all statute that subjects the taxpayer to fines of up to $100,000.00 ($500,000.00 for corporations) and imprisonment of up to 5 years for the willful attempt in any manner to evade or defeat any tax under the Internal Revenue Code. While used sparingly by the U.S. Justice Department, it nevertheless remains a potential trap for even the most innocuous and benign transgressions of the IRC.

Fraud and False Statements


Any person who makes a false or fraudulent statement, or assists another person to make a false or fraudulent statement in connection with documents submitted to the IRS, such as Form 433A or B, or an offer in compromise or a closing agreement, may be prosecuted under this statute and, if convicted, subjected to a fine of up to $100,000.00 ($500,000.00 in the case of a corporation) and imprisoned up to three years. Concealment of property from the IRS, or withholding, falsifying or destroying records, also subjects the person to prosecution under this statute.

Failure to File Returns, Supply Information, or Pay Tax


This is another broad statute that can be used to criminally convict a taxpayer for failing to file a tax return, filing an incomplete one, or not paying the tax that is due. The taxpayer may be fined $25,000.00 ($100,000.00 in the case of a corporation), plus costs of prosecution, and incarcerated up to one year in a federal prison.

If CID recommends prosecution, it will give its evidence to the Justice Department to decide the special charges. Individuals are typically charged with one or more of three crimes: tax evasion, filing a false return, or not filing a tax return. All of which are tax fraud.

The sooner you hire tax counsel experienced in criminal tax matters, the higher the chance that further escalation of your case in the criminal arena could be avoided or limited.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.

How The IRS May Start A Criminal Investigation Against You?

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The IRS Criminal Investigation Division (“CID”) is made up of Special Agents who are duly sworn law enforcement officers who are trained to “follow the money”. CID may open up an investigation in higher profile cases as a result of coordination with the FBI, DEA, INS and other agencies. However, average citizens should not assume that they are immune from investigation by the CID. They may be targets of special programs, such as those involving tax protester groups, bankruptcy fraud, or bank deposits or currency exchange transactions involving cash of $10,000.00 or more. In addition, they may be referred to CID by Revenue Agents of the Examination Division or Revenue Officers of the Collection Division who have reason to believe that there may be fraud or tax evasion involved in the cases they are working. Finally, CID may open an investigation simply as a result of a telephone call to their “squeal” line if it feels that the call warrants further investigation.

A criminal case is the most serious kind of case that IRS can have against a taxpayer. Nothing even comes close to the impact of an investigation by the Criminal Investigation Division. If it results in a referral to the U.S. Justice Department and subsequent prosecution, the consequences may be devastating, including damage to the taxpayer’s personal and business reputation, financial ruin, break up of his or her family unit, and, worst of all, incarceration.

If you are contacted by Special Agents and asked to be interviewed, decline the interview and contact a criminal attorney immediately. Do not say anything to them. Anything you say may be held against you – even statements you may consider to be innocuous. For example, many criminal statutes require an element that is known as “willfulness.” Willfulness is a state of mind that cannot be demonstrated through direct evidence. The government must resort to circumstantial evidence to prove a state of mind, such as statements by the taxpayer. Therefore, even statements about the weather, depending on the context in which they are made, may be relevant to prove “willfulness.” An unwary taxpayer, encouraged by seemingly friendly and low-key Special Agents, may disclose information that is damaging to his or her case.

How do you know you have been contacted by Special Agents? They almost always travel in pairs, show their gold badges, and, as a matter of policy, usually read your “Miranda” rights on initial contact.

The need to retain counsel cannot be overemphasized. The criminal “game” is played by special rules and you need a representative who knows them.

If CID recommends prosecution, it will give its evidence to the Justice Department to decide the special charges. Individuals are typically charged with one or more of three crimes: tax evasion, filing a false return, or not filing a tax return. All of which are tax fraud.

The sooner you hire tax counsel experienced in criminal tax matters, the higher the chance that further escalation of your case in the criminal arena could be avoided or limited.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.