• 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.