IRS Developing Potential Fraud Cases

25.1.11.4  (01-09-2008)
Developing Potential Fraud Cases

  1. Generally, the Service must illustrate that there is (1) tax due, and (2) underpayment of tax due, to demonstrate intent to evade tax or willful and material submission of false statements or false documents in connection with an application and/or return. Review the criminal criteria set forth in LEM Law Enforcement Manual (LEM) 5.4 for additional guidance.

  2. Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce or avoid their taxes by legitimate methods. Tax evasion and tax avoidance are different. Tax evasion is the illegal act of not reporting income, underreporting income, or providing false information to the IRS. Tax avoidance is a legal means used to lower tax liability by arranging financial affairs to the best advantage and by claiming rightful deductions, credits, and adjustments. Avoidance does not involve concealment or misrepresentation, but works within the legal parameters to shape events to reduce tax. Fraud may exist when a taxpayer willfully attempts to illegally underreport taxes, not pay taxes, or both.

  3. Common indicators of fraud within Campus Collection involve the following issues:

    Expense/Deductions Related: Substantial personal expenditures that are more than available resources, or deducted as business expenses.

    • Example: No apparent explanation is available for how the taxpayer is living each month with a high negative income
    Income Related: Either bank deposits from unexplained sources substantially exceed reported income, or concealment of bank accounts, brokerage accounts, and other property.

    • Example: Either the income or other revenue reported by payers to the IRS do not account for the amount of bank deposits, or there are no bank accounts or investments reported by the taxpayer, although payers report interest to the taxpayer.

    Conduct of the Taxpayer: Patterns of consistent failure to file or to report income, although substantial amounts of taxable income were received.

    • Example: Payers report substantial income to the IRS for the taxpayer, however, no returns are filed for those years.
    Methods of Concealment: Assets are placed in another's name or there is a close relationship between parties to a transfer, rendering a tax not due, not payable, or substantially reduced.

    • Example: No real property reported, but lenders report mortgage interest paid by the taxpayer to the IRS, or taxpayer maintains control of assets or income but claims not to be the owner.

  4. Refer to IRM 25.1.2.2 , Indicators of Fraud, for additional information on fraud indicators.

  5. When a potential fraud indicator is found, fraud development must be considered, even though further consideration may find that a referral or transfer of the case is not warranted. The CFFC should assist with assessing the fraud development potential and determine an appropriate plan of action.

  6. Further development of the fraud indicators is necessary to document firm indications (affirmative acts) for successful fraud cases.


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