- 25.1.1.1 Overview
- 25.1.1.2 Definition of Fraud
- 25.1.1.3 Indicators of Fraud
- 25.1.1.4 Criminal Statutes
- Exhibit 25.1.1-1 Criminal Violations
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This section provides an overview of fraud as well as defines and details the elements of fraud.
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This handbook is a comprehensive guide for employees in the Small Business/Self-Employed (SBSE), Tax Exempt/Government Entities (TEGE), Wage & Investment (W&I), Large & Mid-Size Business (LMSB) and Criminal Investigation (CI) organizations. This guide covers the recognition and development of potential fraud issues, referrals for criminal fraud, duties and responsibilities in joint investigations, civil fraud cases and other related fraud issues.
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The primary objective of the fraud program is to foster voluntary compliance through the recommendation of criminal prosecutions and/or civil penalties against taxpayers who evade the payment of taxes known to be due and owing.
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The discovery and development of fraud cases are a normal result of effective investigative techniques. Techniques employed by compliance employees should be designed to disclose not only errors in accounting and application of tax law, but also irregularities that indicate the possibility of fraud.
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Generally, for fraud to be considered the compliance employee must show:
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An additional tax due and owing due to deliberate intent to evade tax; or
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The willful and material submission of false statements or false documents in connection with an application and/or return.
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The fraud referral specialist (FRS) plays a vital role in the development of a potential fraud case. The FRS will be consulted in all cases involving potential criminal fraud, as well as those cases that have potential for a civil fraud penalty. The FRS serves as a resource person and liaison to compliance employees in all the business organizations. The FRS is available to assist in fraud investigations and offer advice on matters concerning tax fraud to all business organizations. When a compliance employee suspects a potentially fraudulent situation, the employee will discuss the case at the earliest possible opportunity with his/her manager. If the group manager concurs, the FRS will immediately be contacted and both the group manager and FRS will provide guidance to the compliance employee on how to proceed. Managers will encourage the early involvement of the FRS in all potential fraud cases.
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Fraud is deception by misrepresentation of material facts, or silence when good faith requires expression, resulting in material damage to one who relies on it and has the right to rely on it. Simply stated, it is obtaining something of value from someone else through deceit.
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Tax fraud is often defined as an intentional wrongdoing on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires both:
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An underpayment; and
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A fraudulent intent.
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The compliance employee must be familiar with the following legal terms in order to understand the requirements of proof:
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Burden of Proof is the obligation to offer evidence that the court or jury could reasonably believe in support of a contention. In tax fraud cases, the burden of proof is on the Government.
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Evidence is data presented to a court or jury in proof of the facts in issue and which may include the testimony of witnesses, records, documents, or objects. Evidence is distinguished from proof in that the latter are the result or effect of evidence.
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Direct Evidence is evidence in form of testimony from a witness who actually saw, heard, or touched the subject of questioning. Evidence, which is believed, proves existence of fact in issue without inference or presumption.
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Circumstantial Evidence is evidence based on inference and not personal observation.
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Presumption (of law) is a rule of law that courts and judges will draw a particular inference from a particular fact, or from particular evidence, unless and until the truth of such inference is disproved.
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Inference is a logical conclusion from given facts.
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Preponderance of evidence is evidence that will incline an impartial mind to one side rather than the other so as to remove the cause from the realm of speculation. It does not relate merely to the quantity of evidence. Simply stated, evidence which is more convincing than the evidence offered in opposition.
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Reasonable doubt is a doubt founded upon a consideration of all the evidence and must be based on reason. Beyond a reasonable doubt does not mean to a moral certainty or beyond a mere possible doubt or an imaginary doubt. It is such a doubt as would deter a reasonably prudent man or woman from acting or deciding in the more important matters involved in his or her own affairs.
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Willful Intent to Defraud is an intentional wrongdoing with the specific purpose of evading a tax believed by the taxpayer to be properly owing.
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Clear and Convincing Evidence is evidence showing that the thing to be proved is highly probable or reasonably certain. This is a greater burden of proof than preponderance of the evidence but less than beyond a reasonable doubt.
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Understanding the requirements of proof is essential in establishing fraud. In all criminal and civil fraud cases, the burden of proof is on the Government.
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The major difference between civil and criminal fraud is the degree of proof required.
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In criminal cases, the Government must present sufficient evidence to prove guilt beyond a reasonable doubt.
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In civil fraud cases, the Government must prove fraud by clear and convincing evidence.
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Civil fraud cases are remedial actions taken by the government such as assessing the correct tax and imposing civil penalties as an addition to tax, as well as retrieving transferred assets. Civil penalties are assessed and collected administratively as a part of tax.
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Criminal fraud cases are punitive actions with penalties consisting of fines and/or imprisonment. Criminal penalties:
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Are enforced only by prosecution;
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Are provided to punish the taxpayer for wrongdoings; and
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Serve as a deterrent to other taxpayers.
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One tax fraud offense may result in both civil and criminal penalties.
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Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. One who avoids tax does not conceal or misrepresent, but shapes and preplans events to reduce or eliminate tax liability within the perimeters of the law.
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Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts are deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are.
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Common evasion schemes include:
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Understatement or omission of income,
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Claiming fictitious or improper deductions,
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False allocation of income, and/or
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Improper claims, credits, or exemptions.
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Taxpayers who knowingly understate their tax liability often leave evidence in the form of identifying earmarks (or indicators).
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Fraud indicators can consist of one or more acts of intentional wrongdoing on the part of the taxpayer with the specific purpose of evading tax. Fraud indicators may be divided into two categories: affirmative indications or affirmative acts. No fraud can be found in any case unless affirmative acts are present.
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Affirmative indications serve as a sign or symptom, or signify that actions may have been done for the purpose of deceit, concealment or to make things seem other than what they are. Indications in and of themselves do not establish that a particular process was done; affirmative acts also need to be present. Examples include substantial unexplained increases in net worth, substantial excess of personal expenditures over available resources, and bank deposits from unexplained sources substantially exceeding reported income.
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Affirmative acts are those actions that establish that a particular process was deliberately done for the purpose of deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events, or make things seem other than what they are. Examples include omissions of specific items where similar items are included, concealment of bank accounts, failure to deposit receipts to business accounts, and covering up sources of receipts.
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Willfulness is a common element of tax crimes. Willfulness is defined as a voluntary, intentional violation of a known legal duty. A good faith misunderstanding of the law or good faith belief that one is not violating the law negates willfulness.
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The Exhibit 25.1.1–1 is a listing of the elements necessary for the most common statutes under which criminal prosecution is recommended by CI. These elements were taken from the statutes.
| Criminal Statutes | Elements Necessary For Prosecution | |
|---|---|---|
| Title 26 USC Section 7201 (Evasion) Felony | (1) Willfulness (2) Attempt to evade or defeat (usually involves concealment or deception) tax or payment thereof (3) Tax deficiency |
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| Title 26 USC Section 7202 (Trust Fund Violation—Willful Failure to Collect or Pay Over Tax) Felony | (1) Willfulness (2) Requirement to collect, truthfully account for, and pay over employment taxes (3) Either failure to collect any tax or failure to truthfully account for and pay over any tax or both |
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| Title 26 USC Section 7203 (Failure to File or Failure to Pay) Misdemeanor | (1) Willfulness (2) Requirement to file a return, pay an estimated tax or tax, maintain records, or supply information (3) Failure to file a return, pay an estimated tax or tax, maintain records, or supply information |
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| Title 26 USC Section 6050I in Conjunction with 26 USC Sections 7203 and 7206 (Trade or Business Required to File a Form 8300 for Receiving More Than $10,000 Cash) Felony | (1) Willfulness (2) Subject to reporting requirement relating to cash of more than $10,000 received in trade or business (3) Evasion of reporting requirement by: a. Causing a trade or business to fail to file report, or b. Causing a trade or business to file false report, or c. Structuring transactions to avoid report |
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| Title 26 USC Section 7204 (Employee Wage Statements) Misdemeanor | (1) A
duty to deduct employment tax or to withhold income tax (26 USC 3102(a), 3402(a) (2) A duty to timely furnish to the employee a written statement showing specified information concerning the deductions (26 USC 6051) (3) Furnishing a false or fraudulent statement to an employee, or the failure to furnish a statement to an employee at the required time and in the required manner (4) Willfulness |
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| Title 26 USC Section 7205 (False W–4) Misdemeanor | (1) A
duty to supply information to employer (26 USC 3402(f)(2) (2) Furnishing false or fraudulent information or failure to supply information which would require an increase in tax to be withheld (3) Willfulness |
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| Title 26 USC Section 7206(1) (False return) Felony | (1) Making
and subscribing a return, statement or other document under penalty of perjury (2) Knowledge that it is not true and correct as to every material matter (3) Willfulness |
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| Title 26 USC Section 7206(2) (Assisting in Preparation of False Return) Felony | (1) Aiding
or assisting in, producing, counseling, or advising the preparation or presentation
of a document in connection with matters arising under the internal revenue
laws (2) The document was false as to a material matter (3) Willfulness |
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| Title 26 USC Section 7206(4) (Removal or Concealment with Intent to Defraud) Felony | (1) Tax
imposed on property (2) Property on which tax is imposed or will be imposed or levy is authorized (3) Removal or concealment (4) Intent to evade or defeat assessment or collection of tax |
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| Title 26 USC Section 7206(5) (Compromises & Closing Agreements) Felony | (1) Willful
concealment of property or (2) Willful withholding, falsifying and destroying records. (3) Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement. |
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| Title 26 USC Section 7207 (Submission of False Documents) Misdemeanor | (1) Wilfulness (2) The delivery or disclosure to any officer or employee of the Internal Revenue Service of any list, return, account, statement, or other document (3) The return, statement, or other document is false or fraudulent as to a material matter (4) Knowledge of material falsity |
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| Title 26 USC Section 7212(a) "Omnibus Clause" ) Felony | (1) A
corrupt effort, endeavor, or attempt (2) To impede, obstruct or interfere with (3) Due administration of Title 26 |
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| Title 26 USC Section 7212(a) (Corrupt or Forcible Interference) Felony or Misdemeanor | (1) Use
of force or treats of force (2) To intimidate, impede or obstruct (3) An officer or employee of the U.S. acting in official capacity under Title 26 |
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| Title 26 USC Section 7212(b) (Forcible Rescue of Seized Property) Felony | (1) Forcible
rescue or attempt to forcibly rescue (2) Seized property (3) Knowledge of seizure |
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| Title 26 USC Section 7215 (Collection & Paying Tax) Misdemeanor | (1) The
taxpayer was a person required to collect, account for, and pay over income
tax withholding on wages and FICA taxes (2) The taxpayer was notified of the failure to collect, account for, and pay over (3) The taxpayer failed to collect, account for, and pay over the taxes, while not entertaining a reasonable doubt as to whether the law required the taxpayer to do so, and the failure was not due to circumstances beyond the taxpayer’s control |
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| Title 26 USC Section 7232 (Failure to Register) Felony | Fails
to register in connection with taxable purchase — diesel fuel and special
motor fuels or Falsely represents that he is registered or Willfully makes false statement in an application for registration. |
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| Title 18 USC Section 2 (Aiding and Abetting) Felony or Misdemeanor | (1) The
taxpayer associated with the criminal venture (2) The taxpayer knowingly participated in the venture, and (3) The taxpayer sought by his or her actions to make the venture succeed |
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| Title 18 USC Section 152(1) (Concealment of Property) Felony | (1) The bankruptcy proceeding was in existence; (2) The defendant fraudulently concealed the property from the custodian; and (3) The property belonged to the bankruptcy estate. |
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| Title 18 USC Section 152(2) (False Oath or Account) Felony | (1) The existence of a bankruptcy proceeding; (2) A statement under oath; (3) The statement must be material; (4) The statement must be false; and (5) The statement was made knowingly and fraudulently. |
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| Title 18 USC Section 152(3) (False Declarations) Felony | (1) The existence of a bankruptcy proceeding; (2) The defendant made a false declaration, certificate, verification, or other statement in relation to the bankruptcy proceeding; (3) The statement was material; and (4) The statement was known to be false. |
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| Title 18 USC Section 152(4) (False Claims) Felony | (1) That bankruptcy proceedings had been commenced; (2) That defendant presented or caused to be presented a proof of claim in the bankruptcy; (3) That the proof of claim was false as to a material matter; and (4) That the defendant knew the proof of claim was false and acted knowingly and fraudulently. |
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| Title 18 USC Section 152(5) (Fraudulent Receipt of Property) Felony | (1) The defendant receives a material amount of property from a debtor; (2) Such transfer occurred after the filing of a case under Title 11; and (3) The acts were done with the intent to defeat the provisions of Title 11. |
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| Title 18 USC Section 152(6) (Extortion and Bribery) Felony | (1) The defendant gives, offers, receives, or attempts to obtain money or property, remuneration, compensation, reward, advantage, or promise for acting or forbearing to act in any case under Title 11; and (2) The action was made knowingly and fraudulently. |
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| Title 18 USC Section 152(7) Fraudulent Transfer or Concealment) Felony | (1) The defendant fraudulently transferred or concealed the defendant's property or the property of another; and (2) Such act of transfer or concealment was done with the intent to defeat the provisions of Title 11, or in contemplation of a case under Title 11. |
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| Title 18 USC Section152(8) (Destruction or Alteration of Recorded Information) Felony | (1) A bankruptcy proceeded existed; (2) The defendant concealed, destroyed, or mutilated the documents; (3) Such documents related to the property or financial affairs of the debtor; and (4) The defendant acted knowingly and fraudulently. |
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| Title 18 USC Section 152(9) (Withholding of Recorded Information) Felony | (1) That a bankruptcy proceeding existed; (2) That the defendant withheld from the trustee entitled to its possession, books, documents, records, or papers; (3) That such documents related to the property or financial affairs of the debtor; and (4) That the defendant withheld the documents knowingly and fraudulently. |
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| Title 18 USC Section157 (Bankruptcy Fraud) Felony | (1) Defendant devised or intended to devise a scheme or artifice to defraud; and (2) For the purpose of executing or concealing such scheme or artifice or attempting to do so; (3) Files a petition under Title 11; or (4) Files a document in a proceeding under Title 11; or (5) Makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under Title 11. |
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| Title 18 USC Section 286 (Conspiracy to Defraud the Government with Respect to Claims) Felony | (1) An
agreement, combination, or conspiracy to defraud the United States (2) By obtaining or aiding to obtain the payment of any false, fictitious or fraudulent claim. |
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| Title 18 USC Section 287 (False Fictitious or Fraudulent Claims) Felony | Knowingly
makes or presents (statute does not require that person providing false information
to return discounter* who filed return actually file return to be guilty under
287) a false, fictitious or fraudulent claim knowing that claim filed is false, fictitious or fraudulent. *Files return for T/P for percentage of refund. |
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| Title 18 USC Section 371 (Conspiracy) Felony | (1) The
general conspiracy statute encompasses two distinct types of conspiracies a. A conspiracy to commit any federal offense b. A conspiracy to defraud the United States or any agency thereof, which includes the Service (2) the essential elements of a Section 371 offense are: a. An agreement by two or more parties b. To commit an offense against the United States; or, to defraud the United States or one of its agencies c. An overt act by one or more of the parties in furtherance of the agreement The requisite intent to defraud or to commit the substantive offense |
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| Title 18 USC Section 1001 (False Statements) Felony | (1) Either: a. Falsifying, concealing or covering up any material fact by any trick, scheme, or device; or b. Making false, fictitious or fraudulent statements or representations; or c. Making or using any false writing or document. (2) Knowingly and willfully. (3) In a matter within the jurisdiction of a department or agency of the United States. (4) The false matter was of a material nature. |
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| Title 18 USC 1956 (Laundering of Monetary Instruments) Felony | Whoever
knowing that property involved is proceeds from a specified unlawful activity
(SUA) (person knew that proceeds was from some activity that constitutes a
felony under state, federal or international law) Conducts or attempts to conduct a financial activity involving proceeds of a SUA (1) With intent to promote the SUA or (2) With intent to engage in conduct in violation of 7201 or 7206 or Whoever knowing the transaction is (1) Designed to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of the SUA or (2) To avoid a transaction reporting requirement under a State or Federal law. |