DECEMBER 2014
In This Issue


"You can ignore reality but you cannot ignore the consequences of reality."

 

We want to wish you and yours a happy holiday season!

 

The goal of this e-newsletter is to provide you critical, inside information that will help you prevail when defending an IRS criminal case. We will do this by sharing the knowledge we have from our 25+ years of experience as an IRS Special Agent. 

 

 

We are grateful to have the opportunity to provide you this valuable information via our monthly e-newsletter and our unparalleled forensic accounting and investigative services.

 

We take special care to ensure the information we provide you in "The Beacon" is the latest and most current information available. . In this edition, we have addressed the badges of fraud and a case study as an example.

  

We want to write about topics that will assist you in prevailing with criminal IRS cases. Please e-mail us your topics of interest to Thebeacon@sageinvestigations.com. 

 

We encourage you to share our e-newsletter with others in your sphere of influence.

 

Sincerely,

 

Edmond J. Martin

 
Principal, Chief Investigator
Certified Fraud Examiner (CFE)

Texas Certified Investigator (TCI)

 

Badges of Fraud      

IRS employees are trained to look for "badges of fraud" IRM 25:1.2.3 (04-24-2014) while carrying out their functions as revenue or collection agents. These badges include, but are not limited to, the following items:
  • Omitted sources of income
  • Fictitious or substantially overstated expenses
  • Inability to explain substantial increases in net worth
  • Personal expenditures exceeding reported sources
  • Multiple sets of books
  • Failure to make records available
  • Falsified entries
  • False statements regarding material facts pertaining to the examination
  • Attempts to hinder or obstruct the examination or collection
  • Employee testimony regarding irregular business practices
  • Destruction of books and records
  • Evidence of concealment

With badges of fraud, a pattern over a number of years and indications of a substantial tax liability, the examination may be referred to Criminal Investigation (CI) without the taxpayer's knowledge. How, then, can a taxpayer determine if their examination has been referred? A clear sign is the suspension of audit activities without explanation. If the revenue agent will not disclose the reason for the suspension, to the taxpayer or his representative, IRM 25.1.3.2(1), this is a "red flag." The representative should ask the agent directly if the case has been referred to CI. The agent is not allowed to lie and may decline to answer the questions about the criminal potential. If the taxpayer has not retained legal tax counsel he/she should do so immediately, and counsel should retain an experienced forensic accountant to assist in the defense of the case.

 

Case Study:

 

A traveling sales person working on commission received notice of an audit. The taxpayer personally prepared his tax returns on tax software, established a Schedule C business and did not make estimated tax payments. The taxpayer slowly disclosed information as requested by the revenue agent. The revenue agent interviewed the CPA that assisted the taxpayer, and the CPA complained about the lack of cooperation by the taxpayer. The agent contacted the taxpayer's employer and requested records and the employment contract. The agent found that the taxpayer was reimbursed for his travel expenses and received the reimbursement through an undisclosed bank account. The agent determined that these activities transpired over a number of years.

 

In the response to requests for information, the taxpayer produced a document that was altered in an attempt to justify the Schedule C business expenses. With the "badges of fraud" in mind, a pattern of
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At Sage Investigations we are dedicated to serving our clients nationally, to help them navigate the difficulties of dealing with the IRS, and other complex (forensic) financial fraud investigations both civil and criminal. By narrowing our focus to our primary strength of following the money, we steer our knowledge, efforts, and experience to financial issues. We help our clients propel their cases forward by assisting in the review, acquisition, and organization of financial records, evaluating the elements of their cases, and helping create winning strategies. Through the use of our proprietary advanced financial investigative technology we analyze complex financial data quickly, easily and efficiently, saving our client's time and money.

 

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Phone: 512-659-3179

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