For the unfortunate few, a questions often raised to their tax attorney is how they became the target of an IRS criminal investigation.  Although the IRS Criminal Investigation Division has many sources to begin an investigation, one of the main sources are referrals from other IRS agents (Revenue Officers and/or Revenue Agents).  These agents are on look-out for signs of fraud, or "badges of fraud," that may warrant a referral to develop the case further.  

By no means an exclusive list, some of the badges of fraud an IRS agent will look for include:

  1. Omissions of specific income items where similar items are included.
  2. Omissions of entire sources of income.
  3. Unexplained failure to report substantial amounts of income identified as received.
  4. Substantial unexplained increases in net worth, especially over a period of years.
  5. Substantial personal expenditures exceeding reported available resources.
  6. Bank deposits from unexplained sources substantially exceeding reported income.
  7. Concealment of bank accounts, brokerage accounts, and other property.
  8. Inadequate explanation for dealing in large sums of currency, or the unexplained expenditure of currency.
  9. Substantial amounts of personal expenditures deducted as business expenses.
  10. Trust fund loans disguised as expenses or deductions.
  11. Maintaining multiple sets of books or no records.
  12. False entries, or alterations made on the books and records; back-dated or post-dated documents; false invoices, false applications, false statements, or other false documents or applications.

Kevan McLaughlin is a San Diego tax attorney who defends taxpayers before the IRS, FTB, BOE, EDD, and Department of Justice. 

San Diego tax attorney Kevan McLaughlin discusses some of the "badges of fraud" that can be a trigger in referring a civil IRS audit to criminal investigations. 

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