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Recovering Financial Information From Trash or Mail

Written by TaxSqueal. Posted in Blog

Special agents will sift through plastic garbage bags containing foodstuffs, dirty diapers, discarded papers, etc. in an effort to find clues or evidence that may bolster an investigation. Depending on what is discovered, a search warrant may follow or a criminal investigation may be started. Obviously tax investigators are hoping to uncover financial related records, telephone records, EZ-pass invoices, as well as other leads that may be analyzed in the paper trail of evidence. Discarded bank statements indicating large balances, deposit slip copies, money wrappers, rubber bands, will all point investigators in a particular direction, possibly consistent with the original allegation or squeal.
In 1988 the Supreme Court ruled that law enforcement may rummage through ordinary household trash left curbside WITHOUT the need to obtain a search warrant. Once the trash is discarded and placed curbside, there is no longer a reasonable expectation of privacy in the contents of the trash. However, law enforcement must exercise caution as to not violate the curtilage.   Curtilage generally means the area inside the boundary of a person’s residence or business locale, which has been marked off by a variety of natural or man-made products. These consist of sidewalks, tree lines, shrubs and fences among others. Within this area an individual possesses a reasonable expectation of privacy pursuant to the fourth amendment to the Constitution. It is imperative that the investigators adhere to the rules of evidence and chain of custody, especially if findings are to be used in a legal proceeding.
Similarly, when an individual mails a letter or package via the U.S. Postal Service, any reasonable expectation of privacy pertaining to the outside of envelopes and parcels is lost. Special agents, in association with the U.S. Postal Inspectors can make a list or record of anything appearing on the outside of assorted mail. This is commonly referred to as a “mail cover.” Items such as postmarks and return addresses often provide worthwhile financial leads for the investigators. Particularly useful financial information would include names of banks, credit card companies and brokerage houses, as well as insurance carriers.

Tax Fraud and its Accompanying Red Flags

Written by TaxSqueal. Posted in Blog

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)

There are thousands of ways that individuals and businesses commit tax fraud.  However, regardless of which scheme is employed, certain characteristics are typically present. Shown below is a list of several of the more common red flags of tax fraud:

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.

The Role of an Informant in Tax Fraud Investigations

Written by TaxSqueal. Posted in Blog

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.

Informants supply information, anonymously or otherwise for a variety of reasons. Oftentimes, informants themselves are involved in the tax fraud or other financial crime and attempt to deflect suspicions concerning their own activities. In addition, when facing a jail sentence, informants may “squeal” in an attempt to mitigate a potential prison term based upon their cooperation. Still others want to “do the right thing” and report a tax fraud that they may find troublesome, immoral or dishonest. Some informants have no other motivation than their belief that everyone should pay their fair share of taxes and simply desire to level the playing field. There are also those informants who are motivated by the possibility of a monetary reward based upon their knowledge of wrongdoing (FYI-the myth of an automatic 10% finder’s fee is erroneous). Unfortunately, such reward pay-outs are rare unless they involve hundreds of thousands of dollars in taxes. Additionally, the information provided must result in an additional tax assessment, which must be paid in full before any portion of the applicable reward percentage, if any, becomes payable. This is an extremely time consuming and drawn out process. Additionally, any reward payments are considered taxable income, while the aspects of maintaining complete anonymity become limited. Revenge is perhaps the most common reason informants come forward. Many feel they have been cheated or are trying to get even. The best informants are the ex’s; ex-spouses, ex-employers or ex-anybodies (friends, neighbors, etc).
It is vital that investigators determine the motivation of the informant if possible, since this will enable proper evaluation/assessment of the details/facts provided, as well as how to deal with the informant in the future.
  • 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?
Control is the key factor for any investigator when dealing with an informant. The informant MUST take direction from the investigator and not vice-versa. Without proper control the integrity of the investigation, as well as the safety of those involved could be jeopardized.  Informants are a powerful resource when investigating tax fraud, but all information supplied should be corroborated via other sources and means to validate its accuracy.

Indicators Of Tax Fraud

Written by TaxSqueal. Posted in Blog

When evaluating anonymous allegations of tax fraud, financial investigators are looking for certain bits of information, that when pieced together, could point to a potential pattern of deception. Oftentimes, contained within the voluminous financial and accounting records belonging to any individual taxpayer or business there are often physical indicators that may signal a pattern of tax evasion. Some of the possible indicators that signify a tax fraud may be occurring are:
  • 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
However, the mere presence of any one or more of these indicators is not sufficient for a financial investigator to conclude that a tax fraud has been committed. The key element necessary in order to prove the crime of income tax evasion is INTENT. Intent in tax investigations is defined as “bad purpose.” In other words, what was the person’s rationale or mindset for doing what they did when they did it? It is incumbent upon the investigators to show that the fraud was not simply the result of a random error, accident or other unknown factor, but rather the result of a purposeful act.
For example, consider the business owner who cashed a customer’s check in the amount of $7500.00 at a check cashing establishment rather than depositing the check in the business bank account as he/she ordinarily would. If this check is not recorded in the company books and records, gross sales would be understated and consequently less tax would ultimately be remitted. However, suppose the entire $7500.00 was used to pay medical bills. It is true the proper tax may have been avoided, but the fact that the funds were utilized for medical treatment would most probably mitigate intent. The bottom line is that the tax would still be owed, undoubtedly with penalty and interest, but the act would not be considered income tax evasion.
On the other hand, the presence of certain tax fraud indicators appearing over more than one tax year will bolster intent in most income tax evasion investigations. Such situations help establish a pattern of criminal conduct occurring over an extended period of time, therefore negating the possibility of a simple error or omission on the part of the taxpayer.


Initiation Of A Tax Fraud Investigation

Written by TaxSqueal. Posted in Blog

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 such as resources, funding and time constraints.  Individuals ultimately selected for investigation are chosen carefully and methodically. Considerations include the total dollar amount of the alleged tax fraud, age and education level of the suspect, availability of evidence, as well as overall jury appeal. Quite simply, the Government does not want to expend substantial resources conducting an in-depth tax investigation and subsequently lose a case in court. This is why the process of initiating a tax fraud case is extremely structured and stringent.
Investigations that are initiated usually involve thousands of dollars in unreported income, coupled with a flagrant disregard for the tax laws. Such tax frauds are primarily motivated by greed. Publicity of successful prosecutions is aggressively pursued by the Government is in an effort to deter other taxpayers from committing similar tax violations. This becomes particularly apparent during the tax filing season in and around April 15th.
Whether beginning an investigation or simply gathering information about the alleged tax evader, it is going to have a significant impact upon that person’s life. When an investigator rings a neighbor’s doorbell or shows his/her badge to a banker to ask questions about the alleged tax cheats financial accounts, a series of events start to unravel that cannot be stopped. Being accused of any criminal activity is embarrassing enough, but possibly worse is to having such as accusation circulating amongst family, friends and business associates.
Once confronted with tax fraud allegations or investigative findings, individuals generally tell the truth, lie or squeal on someone else. Their reputations, established professions, financial well-being, as well as family and social relationships hinge upon the investigation and its ultimate outcome. This emphasizes the importance of providing complete, detailed and accurate information when submitting anonymous allegation forms in instances of suspected tax fraud.