Badges of Fraud

“Badges of fraud” commonly used by taxpayers to deceive or defraud the government include the following:

Badges of Fraud – Income

  • Omissions of specific items where similar items are included.
  • Omissions of entire sources of income.
  • Unexplained failure to report substantial amounts of income determined to have been received.
  • Substantial unexplained increases in net worth, especially over a period of years.
  • Substantial excess of personal expenditures over available resources.
  • Bank deposits from unexplained sources substantially exceeding reported income.
  • Concealment of bank accounts, brokerage accounts, and other property.
  • Inadequate explanation for dealing in large sums of currency or the unexplained expenditure 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, contrary to normal practices.
  • Failure to file a return, especially for a period of several years although substantial amounts of taxable income were received.
  • Covering up sources of receipts by false description of source of disclosed income and/or nontaxable receipts.

Badges of Fraud – Expenses or Deductions

  • Substantial overstatement of deductions.
  • Substantial amounts of personal expenditure deducted as business expenses.
  • Claiming fictitious deductions.
  • Dependency exemption claimed for non-existent, deceased, or self-supporting persons.
  • Loans of trust funds disguised as purchases or deductions.

Badges of Fraud – Books and Records

  • Keeping two sets of books or no books.
  • False entries or alterations made on the books and records; backdated or postdated documents; false invoices, applications, or statements, other false documents, or applications.
  • Failure to keep adequate records, concealment of records, or refusal to make certain records available.
  • Variances between treatments of questionable items on the return as compared with books.
  • Intentional under or over footing of columns in journal or ledger.
  • Amounts on return not in agreement with amounts in books.
  • Amounts posted to ledger accounts not in agreement with source books or records.
  • Journalizing of questionable items out of correct amount.
  • False receipts to donors by exempt organizations.

Badges of Fraud – Allocations of Income

  • Distribution of profits to fictitious partners.
  • Inclusion of income or deductions in the return of a related taxpayer, when difference in tax rates is a factor.

Badges of Fraud – Conduct of Taxpayer

  • False statement, especially if made under oath, about a material fact involved in the examination.
  • Attempts to hinder the examination. For example, failure to answer pertinent questions, repeated cancellations of appointments, or refusal to provide records.
  • The taxpayer’s knowledge of taxes and business practice where numerous questionable items appear on the returns.
  • Testimony of employees concerning irregular business practices by the taxpayer.
  • Destruction of books and records, especially if just after examination was started.
  • Transfer of assets for purposes of concealment or diversion of funds and/or assets by officials or trustees.
  • Patterns of consistent failure over several years to report income fully.
  • Proof the return was incorrect to such an extent and in respect to items of such character and magnitude as to compel the conclusion the falsity was known and deliberate.
  • Payment of improper expenses by or for officials or trustees.
  • Willful and intentional failure to execute plan amendments.
  • Backdating of applications and related documents.
  • Making false statements on EP/EO determination letter applications.
  • Use of false social security numbers.
  • Submission of false Form W-4.
  • Submitting a false affidavit.
  • Attempts to bribe the examiner.

Badges of Fraud – Methods of Concealment

  • Inadequacy of consideration.
  • Insolvency of transferor.
  • Assets placed in other names.
  • Transfer of all or nearly all of debtors’ property.
  • Close relationship between parties to the transfer.
  • Transfer made in anticipation of a tax assessment or while the investigation of a deficiency is pending.
  • Reservation of any interest in the property transferred.
  • Transaction not in the usual course of business.
  • Retention of possession.
  • Transactions surrounded by secrecy.
  • False entries in books of transferor or transferee.
  • Unusual disposition of the consideration received for the property.
  • Use of secret bank accounts for income.
  • Deposits into bank accounts under nominee names.
  • Conduct of business transactions in false names.