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. The elements necessary for a tax fraud or evasion charge are:
The individual owes additional taxes
The individual attempted to evade his/her taxes
The attempt was willful (intentional)
Unsubstantiated wealth- An individual who exhibits signs of unexplained wealth. Ownership of substantial assets (e.g. luxury automobiles, jewelry, furs, etc.) without the apparent foundation for sustaining such a standard of living is certainly a red flag indicating possible tax evasion.
Apparent lack of gainful employment- An individual who does not work, keeps odd business hours or is secretive regarding his/her occupation, while still maintaining an affluent lifestyle. Such an individual could be involved in money laundering or other financial crimes in conjunction with others.
Utilization of large amounts of currency- An individual who utilizes unusually large amounts of currency to purchase expensive items rather than writing a personal or business check. The consistent payment of regular and periodic expenses totally in cash may be deemed suspicious.
Questionable banking practices- An individual or business that almost exclusively utilizes bank checks, cashier’s checks, money orders and/or postal money orders to conduct their financial affairs. This odd method of conducting monetary matters is a potential income tax evasion clue.
Fictitious names or nominees- An individual who opens bank accounts or buys assets utilizing someone else’s name and identification or completely fabricated information. Real property, boats, stock and bonds are examples of purchases that are frequently conducted by tax evaders in an effort to legitimize their ill-gotten funds, while avoiding financial scrutiny. Additionally, third party checks for expenditures fall under the same red flag category.
An informant in a tax fraud investigation is someone who has specific knowledge of a tax crime and provides this information to the proper taxing authorities, directly or indirectly. Informants, aka “rats” or “snitches” are generally able to supply information that otherwise is unavailable or unknown to tax investigatory agencies like the IRS. Surprisingly, credible informants may prompt an investigation or greatly enhance an on-going tax fraud investigation.
- Why is the information being provided by the informant?
- How does the informant know what he/she knows?
- Does the informant appear credible?
- Are the allegation details provided plausible?
- Is the informant willing to testify in a legal proceeding?
- Can the informant be utilized in an undercover capacity?
- Will the informant agree to recorded consensual monitoring?
- Maintaining two sets of books and records
- Concealment of assets
- Large and/or frequent currency transactions
- Destruction of books and records
- Payment(s) to false or fictitious persons or companies
- False or altered documents
- Over/under valuation of assets
- Use of nominees
- False billings and/or invoices
- Excessive loans to employees, friends and others
- Frequent or unusual use of cash and cashier’s checks
- Cashing of received business checks
- Photocopied invoices and bills, instead of originals
- Personal expenses paid with corporate funds
- Double payment of bills
- More than one endorsement of checks cashed
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.