What are the top signs a criminal tax investigation is forthcoming?

Taxes

While many people think that a criminal tax situation is something that cannot happen to them unless they had the intent to defraud the government, the truth is that criminal tax charges can be triggered by even a slight misstep. Mistakes on your taxes that are perceived as willful misstatements by an IRS agent, and accountant or tax preparer malpractice are but a couple of the common ways that well-meaning taxpayers find themselves facing serious criminal penalties including a federal prison sentence.

In short, the things an average person does not know about tax law or tax crimes can hurt them when faced with an IRS audit or criminal investigation. A tax lawyer can help a taxpayer by providing context for any actions or inactions that might be misinterpreted by the agent, and negotiate a more favorable outcome.

Indicators of Tax Fraud
IRM 25.1.2 provides guidance for IRS agents in investigative techniques to be used in identifying tax fraud. One of the methods utilized by agents is to look for and identify indicators, or “badges” of fraud. The IRS has developed lists of these badges of fraud regarding a taxpayer’s income, expenses and deductions, financial books and records kept, income allocations, the taxpayer’s conduct, and the methods of concealment utilized. In brief, the listed indicators of fraud for each category include:

  • Income – Signs of fraud include entire sources of income being omitted, unexplained increases in net worth, expenditures substantially exceed income, no explanation for the source of certain bank deposits, concealing accounts or assets, excessive dealing in cash, and cashing checks considered income at check cashing services.
  • Expenses or Deductions – Claiming dependency status for independent, deceased, or non-existent individuals, claiming false deductions, and claiming business deductions that are actually personal expenses are all considered badges of fraud.
  • Books & Records – Keeping multiple sets of books, irregularly numbering invoices, making false entries in the records, failing to keep records, providing false receipts, and engaging in nonstandard accounting practices can all lead to tax problems.
  • Allocations of Income – If income or profits are distributed to fictitious individuals, the IRS will consider this a sign of fraud.
  • Taxpayer Conduct – Rude or abusive behavior toward the agent, making false statements, incomplete disclosures, failure to follow the advice of an accountant, backdated documents, submission of a false W-4 and other similar acts are all considered badges of fraud.
  • Methods of Concealment – Placing assets in the names of others, transferring property in anticipation of tax bills, secret transactions, transactions outside the typical course of business, and reservation of rights or interests in purportedly transferred property are all considered to be as badges of fraud.

The foregoing is not a comprehensive list of all items considered badges of fraud by the IRS, but it does indicate the types of issues they are looking for.

What actions by the IRS agent may reveal a pending investigation?
If you are already in contact with an IRS agent, certain actions may tip you off that an investigation may soon follow. While it is good practice to contact a tax attorney immediately upon contact with an IRS agent, you should do so immediately if one of the following scenarios occurs:

  • You have been selected for a random audit and you know that the relevant tax years contain false statements or understatements of income.
  • An agent contacts you seeming particularly concerned about your goals for a transaction and what you hoped to accomplish rather than the form of the transaction itself.
  • You have been audited and in regular contact with an IRS agent. The agent then disappears for weeks at a time and will not return your calls.
  • You have been pursued by an IRS agent requesting that you satisfy a tax debt. You call the agent and he or she will not return your calls.
  • Your accountant, bank or financial institution informs you that your records have been subpoenaed.

While these scenarios do not cover every scenario that should raise an alarm, they do give a good sense of the types of events and scenarios that should trigger concern by a taxpayer. If you find yourself in one of the above situations or in similar circumstances, contact the Brager Tax Law Group immediately. Our tax professionals will work to protect you. Contact us by calling (800) TAX LITIGATOR or contact us online.

Updated: