“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.