Badges of Fraud commonly used by taxpayers to deceive or defraud the government 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.
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-applies to paper books…
- 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.
If you are involved in an audit and the word fraud has been raised–please hire a lawyer. After engaging a lawyer, you can have your lawyer engage our services.
Call us before the IRS calls you. As always, small business services and taxation are our business. If you need help with this issue, or require other services, Please give Art & Business Consulting a call. We would love to engage you as a client.