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

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 5^th 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.