Important Changes to Tax Fraud Assessment


I generally hate to be the bearer of bad tidings, but I have some updates from the world of tax enforcement that you should know about.

As you probably already know, the government (at all levels) needs more money – and they need it bad.  As always, it’s politically difficult to actually raise taxes, although it has been done recently, and more is in the pipeline.  The usual rationale (or PR line, if you want to be a bit cynical) for such tax increases are things like, “making the rich pay their fair share”, “tax reform” or “providing a benefit which everybody needs or wants”.  Of course, one could observe any of the following:

  • The “rich” who have their taxes increased usually includes everybody above a minimal income.
  • Tax reform usually includes complex and narrow tax breaks for a number of favored constituencies.
  • Those benefits we all need and want are going to be administered by government – virtually ensuring inefficiency, injustice and soaring costs.

In any case, while taxes are going up, they’re just not going up fast enough or far enough.  So, more revenue must be brought in while the legislature works through these issues. Some of the best tools tax collectors have to raise more money fast are penalties.  Penalties are cool, because they’re only assessed against wrongdoers, and everybody wants to see wrongdoers punished, right?  As a result, the public generally pushes back against heightened penalty enforcement a lot less than they would against overt tax increases.


Another tool is what is euphemistically known as “efficiency”.  The usual argument for this is, “if everybody only paid their fair share, we’d have plenty of money”.  This gives the tax collectors an opening to be more “efficient”.  Under the heading of “efficiency” go such things as:

Tracking your activities through multiples databases.

  • Dispensing with your rights and/or process in a tax dispute.
  • Being super-aggressive in tax audits.
  • Demanding or taking payments in collection of a tax debt, even if you can’t afford to pay them.

What’s new, you might ask? Well, in dealing with different tax collectors recently, I’ve had the disconcerting experience of having them know more about my client that I did.  Apparently, one of the actions now part of standard practice in tax audits or collection is for the tax agency representative to make a thorough search of all public data available about you – as well as some maybe ‘not-so-public’ data. This includes things like common internet searches (Google, Yahoo, etc.), searches of property records, DMV, criminal records, background checks and credit reports, to name a few.

I’ve had tax collectors tell me they knew about a client’s upcoming jobs recently booked (or even in the negotiation stage), or their travel patterns from airline records. They easily can find out about properties and cars you own, where you bank and where you’ve applied for or received credit.  Anyway, the point here is that our increasingly digital society is making it easier for taxpayers, their actions and their assets to be tracked – all the better to allow assessments of increased tax or more efficient collections when the time comes. Be aware of this!


What else is new?  Well, probably the largest penalty out there is the fraud penalty – it’s 75% of whatever was underpaid.  Think about that one for a moment – if you get audited and owe $10K in additional tax, the fraud penalty (if one were assessed) would be $7,500, and on top of these, you can add late-filing and late-payment penalties and interest. All of these, stacked together, could turn a $10K tax debt into $25K fairly easily.


Consistent with the push for more revenue, the Treasury Inspector General for Administration (TIGTA) has just issued a report stating the IRS has not been proactive enough in assessing these fraud penalties.  So, starting with all office and field audits in 2014, all examiners are going to have to fill out a fraud checklist, and if they find more than a few indicators of fraud, will have to write up the case for referral to a fraud unit, and maybe (depending on what was found) for referral to the criminal investigation unit.

The big change here is that fraud investigations and referrals will not be done only when a tax examiner feels it would be justified; potential fraud will be looked for in each and every audit as part of standard procedure, and will be investigated if more than just a couple of indicators of fraud are found.  Not only that (and this is a big change), fraud will be looked at not only for under-reported income, but also in cases of over-reported deductions.


Why might the IRS be taking such drastic measures? Well, to quote from the report, “opportunities may have been missed to enhance the contribution fraud penalties make”.  How much of a contribution?  In the 3,674 audits reviewed by TIGTA, “we estimate that additional assessments totaling approximately $5.8 million in civil fraud penalties may have been avoided by taxpayers”. That works out to almost $1,600 per audit – for every single audit done by IRS.  How many audits does IRS do in a single year?  In Fiscal 2012, they did roughly 360,000 field audits, meaning they see a chance at additional revenue of $575 million simply by getting more aggressive about assessing the fraud penalty.


OK – so what are the indicators of fraud, per the IRS?  I’ve included an excerpt of the TIGTA report below, listing out many of what they consider to be the indicators of fraud. You should look them over – they could become important if you’re ever audited.

The bottom line is this: tax collectors are being pushed hard to get more money, and the only source of it is we the taxpayers. They have been getting more aggressive in this pursuit, and this aggression will only continue and deepen.  You need to ensure you have a defensible position should you ever happen to fall into the clutches of any of these rapacious agencies.

If you have questions about your tax situation, aren’t sure about something you’re doing, owe money or received the dreaded “letter” and don’t know what to do next, call us! We know the rules, we know the people and we can help.  Don’t wait until it’s too late!

Fraud Indicators—Income

  • Omissions of specific items where similar items are included.
  • Omissions of entire sources of income.
  • Unexplained failure to report substantial amounts of income.
  • Unexplained sources substantially exceeding reported income.
  • Substantial excess of personal expenditures over available resources.
  • Material acquisitions suggest living beyond reported income.
  • Bank deposits substantially exceed reported income.
  • Checks cashed that never hit taxpayer’s bank accounts.
  • Concealment of bank accounts, brokerage accounts, and other property.
  • Inadequate explanation for dealing in large sums of currency.
  • Consistent concealment of unexplained currency, especially in a business not calling for large amounts of cash.
  • Failure to deposit receipts to business account.
  • Failure to file a return, especially for a period of several years, although substantial amounts of taxable income were received.
  • Cashing checks at check-cashing services and banks other than taxpayer’s banks.
  • Covering up sources of receipts by false description of source of disclosed income or nontaxable receipts.
  • Loan applications that state a higher income than shown on the returns.

Fraud Indicators—Allocations of Income

  • Distribution of profits to fictitious partners.
  • Inclusion of income or deductions on return of a related taxpayer.

Fraud Indicators—Deductions

  • Substantial overstatement of deductions.
  • Substantial amounts of personal expenditures deducted as business expenses.
  • Claiming fictitious deductions.
  • Multiple deductions end in zeroes or amounts overuse a particular digit.
  • Dependency exemption claimed for nonexistent, deceased, or self-supporting people.
  • Loans of trust funds disguised as purchases or deductions.

Fraud Indicators—Books & Records

  • Keeping two sets of books or no books.
  • False entries or alterations made on books and records, backdated or post-dated documents, and false invoices, applications, statements, or other documents.
  • Invoices are irregularly numbered, unnumbered, or altered.
  • Checks made payable to third parties are endorsed back to taxpayer.
  • Failure to keep adequate records, concealment of records, or refusal to make certain records available.
  • Variances between amounts or inconsistent treatment of questionable items on return and in books.
  • Intentional under-footing or over-footing of columns in journal or ledger.
  • Amounts posted to ledger accounts not in agreement with source books.
  • Recording income items in suspense or asset accounts.
  • False receipts to donors by exempt organizations.

Fraud Indicators—Conduct of Taxpayer

  • False statement about a material fact during examination.
  • Attempts to hinder examination (e.g., failure to cooperate or answer pertinent questions, repeated cancellation of appointments, refusal to provide records, threatening or assaulting potential witnesses or the agent).
  • Failure to follow advice of accountant or attorney.
  • Failure to make full disclosure of relevant facts to accountant or return preparer.
  • Taxpayer’s knowledge of taxes and business practices.
  • Testimony of employees concerning irregular business practices by taxpayer.
  • Destruction of books and records.
  • Transfer of assets for purposes of concealment or diversion of funds and assets.
  • Consistent failure over several years to fully report income.
  • Return incorrect to such an extent and in respect to items to compel conclusion that falsity was known and deliberate.
  • Payment of improper expenses by or for officials or trustees.
  • Willful and intentional failure to execute pension plan amendments.
  • Backdating of applications and related documents.
  • Conduct or transactions contrary to normal business practices
  • Use of false Social Security Numbers.
  • Submission of false forms (e.g., Forms W-22 or W-43).
  • Submitting false affidavits or documents.
  • Attempts to bribe the agent.

Fraud Indicators—Methods of Concealment

  • Insolvency of transferor.
  • Assets placed in another’s name.
  • Transfer of all or nearly all of taxpayer’s property.
  • Close relationship between parties to transfer of property.
  • Transfer made in anticipation of tax assessment or after examination began.
  • Reserves or retains an interest in the property transferred.
  • Transaction not in the usual course of business.
  • Transaction surrounded by secrecy.
  • False entries in books of transferor or transferee.
  • Unusual/de minimis consideration received for the property.
  • Use of secret bank accounts or accounts in nominee names.
  • Conduct business transactions in false names.

Additional Indicators for Fraudulent Failure to File

  • History of non-filing.
  • History of criminal tax prosecutions.
  • Repeated contacts by the IRS.
  • Indications that the non-filer had knowledge of filing requirements (e.g., advanced education, works directly in tax field, or previously filed).
  • Experienced in tax matters (e.g., law professor, CPA, or tax attorney).
  • Attempted to conceal or transfer assets to evade collection of tax later assessed.
  • Furnished false W-4 to employer.
  • The use of dummy business entities or bank accounts under assumed names, or false SSNs in an attempt to conceal the identity of true owner or income earner.
  • Submitted copies of non-filed returns to third parties (e.g., lending institutions when taxpayer intends to secure loans).
  • Large number of cash transactions.
  • Indications of significant income (e.g., interest and dividends earned, investments in IRA accounts, stock and bond transactions, or mortgage interest paid).
  • Substantial tax liability after withholding credits and estimated tax payments.