Financial investigators and IRS Criminal Investigation Special Agents most frequently utilize a technique known as the “specific item method of proof” when building a tax fraud case. This method allows the investigators to present proof that an individual suspect received or disposed of income from a particular source(s) and failed to report the income for tax purposes. The source(s) of income may be legal, illegal or a combination of both. Such proof is referred to as evidence and will be designated as either direct or circumstantial in nature. Whenever proof is obtained by means of  the specific item technique it is referred to as direct proof.   There is an uninterrupted connection between the proof or evidence presented and a financial matter or transaction.   In other words, a “paper trail” of evidence exists that can be documented and/or illustrated via exhibits and testimony, then presented to a jury as necessary.   

 

The IRS regularly receives hundreds of allegations of tax fraud from informants and referring agencies. However, budgetary constraints and manpower restrictions may enable only a select few to rise to the level of a full-scale criminal investigation.   One technique often utilized to determine if there is any credibility to an informant allegation, especially anonymous tax fraud allegations, is to perform a limited surveillance of the residence or business premise address. Depending on what is observed, coupled with available internal records, the special agent may decide to initiate an investigation at that immediately or conduct other covert activities. These additional unique activities could include garbology (trash analysis) or a request for a mail cover. Such investigative practices will typically enhance the evaluation of information prior to initiating an investigation.

Most individual and businesses (corporations, LLCs, partnerships) are required by law to pay taxes on earnings and other sources of income (Yes, even illegally derived income is taxable and must be reported). In order for prosecutors to charge the crime of tax fraud or more precisely, tax evasion three elements must generally be present in order to sustain a conviction. These three essentials must be proven in a court of law, beyond a reasonable doubt. Reasonable doubt is simply a doubt based upon the consideration of all the evidence (facts) and must be premised upon reason. It is not merely a suspicion or speculation.

It is nearly impossible to pick up a newspaper, listen to the radio or watch television nowadays without learning about a financial crime that has been alleged or committed.  Tax fraud seems to be everywhere.  The common thread is MONEY.  Traditional law enforcement agencies generally rely upon physical evidence, crime scene analysis, eyewitness accounts, informants and confessions, among other techniques, to gather proof of a crime.  These methods work best in instances where a crime already has been committed and law enforcement is attempting to identify the criminal.  However, the growth of money motivated crimes mandates the need for financial investigations. Since financial crimes typically involve merely an allegation of tax evasion, a different inquiry approach needs to be employed.  This unique method of investigation is known as the forensic accounting approach. 

The Government’s decision to initiate an investigation of a suspected tax cheat is a tricky one. It depends upon a variety of factors...

Almost everyone is expected to pay taxes. However, there are individuals and businesses that cheat and pay less tax than they actually owe. Regardless of how you feel about paying taxes and how the government uses your money, tax fraud is illegal. Ultimately, tax cheats affect everyone and notifying the appropriate taxing authorities is the proper thing to do.