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New Jersey Contractor Sentenced for Tax Evasion

Written by TaxSqueal. Posted in Tax Fraud Cases

On July 22, 2010, in Trenton, N.J., Daniel Carlo, owner of a construction company, was sentenced to 12 months and a day in prison to be followed by two years of supervised release.  Carlo pleaded guilty in August 2009 to an Information charging him with tax evasion for failing to report $242,764 in income.  According to court documents and statements made in court, Carlo owned and operated a construction company under the name of “Cartar” from his residence in Barnegat. Carlo admitted that in April 2006, he prepared, signed and filed a false 2005 U.S. Individual Income Tax Return which stated that his taxable income for calendar year 2005 was zero.  Carlo failed to report taxable income of approximately $242,764, resulting in approximately $78,792 in tax due and owing.  Carlo admitted that in an effort to hide the unreported income, he deposited client receipts into bank accounts held in the names of his wife and daughter.

Pennsylvania Couple Sentenced on Tax Evasion Charges

Written by TaxSqueal. Posted in Tax Fraud Cases

On July 20, 2010, in Scranton, Pa., Frank and Salli Ann Peperno, husband and wife from Old Forge, were sentenced on charges of tax evasion.  Frank Peperno was sentenced to 43 months in prison; Salli Ann Peperno was sentenced to two years probation with six months of home confinement.  According to court documents, Salli Ann was charged with conspiracy to commit tax evasion in conjunction with a gym, Maximum Health & Fitness, owned and operated by herself and her husband. Frank Peperno was charged with tax evasion and mail fraud. Frank Peperno, a former licensed stockbroker, unlawfully converted monies belonging to clients.

Tax Fraud Investigations Via The Specific Item Method Of Proof

Written by TaxSqueal. Posted in Blog

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.  

A basic example of the specific item method of proof entails the business owner who supplies a product to a customer, issues an invoice for its purchase, receives payment for the product from the customer and chooses NOT deposit the funds into the business bank account.  This course of actions understates gross receipts, while still diminishing inventory and reducing the overall tax consequence. An investigator who was able to locate the sales invoice for the product (if it was not destroyed) and search for the corresponding payment would be conducting a specific item analysis. Usually, where there is one such occurrence there are generally more similar instances of diverted receipts. Fortunately, this is where allegations of tax fraud or financial impropriety from informants are extremely worthwhile since they point investigators in a particular direction. It simplifies the needle in a haystack approach and enhances any on-going tax fraud investigations
Investigators search for several specific items, rather than just one, so as to overcome the potential defense of an oversight or simple mistake by the suspect, as well as demonstrate intent. Direct proof links the individual suspect to the specific financial transaction and illustrates knowledge of the activity being investigated. Investigators often analyze mounds of paperwork and electronic records in an effort to locate questionable transactions in addition to identifying all parties involved. Subsequently, face-to-face interviews often follow to further corroborate and memorialize particular transactions or events. Uncooperative witnesses may be compelled to turn over records when served with a subpoena or administrative summons. The specific item method of proof is fairly straightforward to present at trial and is usually readily understood by the jury once explained by prosecutors. Furthermore, since direct documentary evidence and/or testimony exist to prove the tax fraud, the specific item method of proof is extremely difficult to contest.

Dissecting Business Books and Records

Written by TaxSqueal. Posted in Blog

It is rare that tax fraud investigators or special agents are called upon to reconstruct a complete set of financial books and records to determine whether a tax crime has occurred. More commonly the analysis of existing financial records is the investigative technique employed. Such searches of business books and records are undertaken in an attempt to link financial transactions to criminal activity. The “paper trail” followed when reviewing accounting books and records is sometimes long and winding, but ultimately culminates with a logical conclusion. Unfortunately for the tax cheat, the results are oftentimes those employing deceit and deception.

Informants (anonymous or otherwise), whistleblowers, tax squealers, including ex-spouses, former employees and others frequently point tax fraud investigators in a specific direction. Although their portrayals may facilitate the process, the needle in the haystack must still be discovered to enable a successful prosecution. Sometimes it may be less sophisticated or more ordinary than others. However, allegations by themselves will not sustain a charge of income tax evasion (U.S.C. Title 26, Section 7201). Hence, the skills and expertise of the specially trained financial investigators begin the dissection of available financial records with surgical precision.
The analysis of accounting books and records is referred to as auditing. The process of auditing is comprised of three parts; analyzing, scrutinizing and comparing.  These are key elements fraud investigators employ when searching, tracing and dissecting financial transactions contained within accompanying books and records.
Analyzing – The accounting books and records are divided into their basic components. What this means is that entries in the journals, etc. are each individually analyzed to determine whether or not they were appropriately charged to the correct account. In other words, have basic accounting principles been followed? If not, why not?
Scrutinizing – This is the process of matching documentation, or lack thereof to each transaction. Are there any unusual notes or remarks that do not conform to ordinary business practices and procedures? Was there a business reason for the transaction?  Does back-up documentation exist?
Comparing – This involves evaluation and comparison of the source documents through independent corroboration, outside of the business itself. In other words, are the invoices in fact legitimate? Are the figures appearing on invoices and bills accurate? This is a search for inconsistencies or any transactions that appear to be out of the ordinary.
Adjusting entries are frequently utilized to conceal illegal activities in an effort to balance business books. For example, the owner of a trucking company was diverting funds from his business for his personal use. The financial investigator was examining the books and identified a substantial amount of truck washing expense within the general ledger. Upon further analysis and review, it was determined that the excessive truck washing expenses were being paid to a shell company, controlled by the owner of the trucking business.