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What Are Some Common Warning Signs or “Red Flags” for Tax Fraud (Tax Evasion)?

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    In its 2018 Data Book, the IRS reported investigating nearly 2,900 taxpayers for suspected tax crimes, such as tax evasion (26 U.S. Code § 7201), willful failure to file a return (26 U.S. Code § 7203), or filing a false return (26 U.S. Code § 7206(1)). In an effort to use its resources efficiently and reduce tax fraud effectively, the IRS looks for specific red flags when processing the approximately 140 million returns that are filed annually by U.S. taxpayers. While a single flag might not trigger an examination, the risk of a tax audit – or worse, an IRS criminal investigation – increases exponentially if the IRS detects patterns or clusters of tax errors. If you are worried about a criminal tax investigation or civil IRS tax audit, take swift action to protect yourself by consulting an experienced tax defense professional, like the IRS tax attorneys and CPAs at the Tax Law Office of David W. Klasing. With a nationally renowned record spanning more than 20 years in all areas of civil, criminal, and international tax representation, we know how to limit your criminal tax exposure and mitigate the penalties you face.

    IRS Warning Signs of Federal Tax Evasion

    IRS agents who conduct tax return audits are known as “revenue agents.” Revenue agents are trained to look for certain indicators or “badges” of fraud, which the IRS lists exhaustively in Internal Revenue Manual (IRM) 25.1.2 (Recognizing and Developing Fraud), available here. While IRM 25.1.2 provides valuable information about many subjects (including return preparer fraud, fraud development procedures, and various IRS investigative techniques), most pertinent to this discussion is Section, which provides dozens of examples of IRS indicators of tax fraud. These examples are divided into six subsections, as follows:

    1. Fraud warning signs involving the taxpayer’s income. Examples include:
      • Failing to file tax returns
      • Having bank deposits that far surpass the taxpayer’s reported income
      • Omitting or understating income
      • Reporting sales less than the sum of your 1099’s
      • Large numbers of cash deposits or deposits in excess of 10,000
      • Running a cash intensive business
      • Extensive use of a check cashing service
    1. Fraud warning signs involving the expenses or deductions claimed by the taxpayer. Examples include:
      • Claiming dependents who do not actually exist (or who are deceased)
      • Claiming federal tax deductions that are “fictitious or substantially overstated”
      • Deducting “business” expenses that were in fact personal expenditures
      • Inventing or overstating deductions
    1. Fraud warning signs involving the taxpayer’s business books and financial records. Examples include:
      • Failing to maintain accurate books and records
      • Maintaining multiple, differing sets of books and records
      • Showing discrepancies between business books and tax returns
    1. Fraud warning signs involving the taxpayer’s allocations of income. Examples include:
      • Distributing profits to imaginary “business partners”
    1. Fraud warning signs involving the taxpayer’s personal conduct or behavior. Examples include:
      • Backdating tax or other financial documents
      • Failing to follow a tax professional’s recommendations
      • Lying to IRS agents
      • Taking any actions to obstruct or impede the IRS (“tax obstruction”), which furthermore, could potentially lead to criminal charges under 26 U.S. Code § 7212 (attempts to interfere with administration of internal revenue laws)
    1. Fraud warning signs involving apparent efforts to conceal assets (i.e. suspicious “methods of concealment” that are likely to suggest fraud). Examples include:
      • Engaging in any substantial transfer where there already exists a “close relationship between [the involved] parties”
      • Keeping false records surrounding the transfer
      • Using “secret bank accounts” (such as unreported foreign bank accounts)

    Orange County Tax Evasion Defense Lawyers Serving California

    As this article should make clear, there are countless actions the IRS may perceive as being indicative of tax fraud – particularly if these actions reoccur across multiple tax years and/or coincide with other indicators of fraud. The Department of Justice takes an aggressive approach to prosecuting suspected tax offenders, demanding an equally aggressive defense strategy.

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    If you are worried about a tax audit or criminal investigation, you need the guidance of a proven and tested trial attorney with a record of obtaining favorable case outcomes. There are numerous advantages to having criminal tax defense counsel parallel to a criminal IRS investigation. To arrange a confidential, reduced-rate consultation with a criminal tax defense attorney serving Northern and Southern California, contact the Tax Law Office of David W. Klasing online, or call (800) 681-1295 today.

    An offshore or domestic voluntary disclosure may be the answer as long as you are knocking on the governments door before they start to knock on yours!

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