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.