Curious about “Indicators of Tax Fraud?”

If you receive a letter from the IRS notifying you of an audit, you may not be too worried. If you did a good job on your taxes and have a pretty good idea of your reporting, there is not an enormous reason to sweat. If you know there is potential evidence of tax fraud in your returns, it is a different story altogether.

We talked earlier about eggshell audits. These are audits where you know you have something to lose if the agent or auditor does a dot-to-dot between what you have reported and what was left off the table. If an auditor or an algorithm reviews your return, math or other errors are noted.  Also of interest are any “indicators of tax fraud.” These would be overt or covert behaviors that may, intentionally or not, skew the overall results of a return.

To the Internal Revenue Service (IRS), an indicator of fraud is also called a “badge of fraud.” These behaviors may be an action—a deliberate misstatement, or omission—or a less obvious lack of action. While these behaviors may appear to form a pattern of fraud or a tax crime, these are only “indicators” and not outright proof.  Some behaviors that are considered potential indicators of fraud include:

• Understatement of an actual tax liability
• Statements or actions that make an outcome appear different than it would be if accurate
• A potential indicator of fraud can be made by a taxpayer, tax preparer, or other entity

In practice, indicators of fraud may look like:

• Problems with your tax returns: Failure to file tax returns, underreporting income, or overstating expenses can be associated with tax fraud. Adding completely fraudulent deductions is fast tip-off.
• Record keeping: Inability to provide clear, accurate, complete records is not an indicator of fraud, but the lack of records can be a red flag. Lack of documentation or deposit records is a problem, and so is an inability to prove sources of income. Efforts to unravel missing accounting records sometimes leads to a second, and problematic, set of books.
• Opaque accounting: Loans, suspicious account ownership, missing documents, complex but poorly documented ownership structures, and anything that smacks of concealment can lead an auditor to question your motives and business practices.

If you made a mistake on a return and receive a letter from the IRS concerning an audit, carefully review your documents and follow up with the IRS, unless there is a significant vulnerability. If your return or documents bear some resemblance to a badge of fraud—speak with a good criminal tax attorney first.

Speak with our criminal tax attorney group if you are concerned about allegations of tax crime or fraud

If concerned about compliance, speak with our tax lawyers about your situation and best options—before you reply to an audit or other correspondence from the IRS. We have offices in Chicago and Cleveland and serve clients throughout the US and abroad. Call 440-250-9709 or contact us online today.