Badges of Fraud

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.

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