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.