Fraud & Forensics
Is it Tax Fraud, or Just a Simple Oversight?
The Daily Record, February 9, 2009 by Gina Bliss
Most people experience a little stress this time of year while getting their tax returns done.
You have to find all of the right documents, remember things that happened a whole year ago, use last year’s return as a reference for what’s needed this year and wait for all the statements and 1099s to arrive through the mail.
Most people worry that they’ve forgotten something. But if you file an accurate and timely return and pay the tax, you don’t have to worry about your tax return for another 12 months. If you get a tax refund, you still have all the time, stress and preparation just to get your own money returned to you. At least we’re all in it together. Or are we? This year it’s been less than inspiring to see how some of our government officials handle their own taxes.
Tim Geithner, our new Treasury Secretary, was a high-ranking official in the Treasury Department, then worked at the International Monetary Fund before becoming the head of the Federal Reserve Bank of New York. When he worked at the IMF, he failed to pay self-employment tax of about $50,000. The IMF informed him that he was responsible for it, he signed documents saying he would pay it and he accepted IMF reimbursements for it. He did not pay it.
Later, he paid part of it after an IRS audit. He paid the rest after he was nominated for Treasury Secretary.
Geithner’s now in charge of our nation’s finances and oversees the IRS.
Tom Daschle, the second nominee to Obama’s cabinet, also has income tax issues. Daschle served on the Senate Finance Committee for many years and was nominated to lead the Department of Health and Human Services. He omitted income from his tax returns, starting in 2005, for a car and driver provided to him for 80 percent personal use and also failed to report consulting income. The tax amounted to about $128,000, and he did pay it … last month, after he was nominated to Obama’s cabinet. Daschle’s income tax problems and the questions concerning conflicts of interest caused him to withdraw his nomination.
We also have the withdrawal of Nancy Killefer’s nomination to be our nation’s first chief performance officer, charged with increasing efficiencies and eliminating government waste.
Her qualifications include a stint with the Clinton administration as assistant Treasury secretary for management. There she was the chief financial officer and chief operations officer for the Treasury. Her work included modernizing the IRS, the largest component of the Treasury Department.
She also withdrew her nomination over tax issues, but in her case the problem was with payroll tax. In 2005 the District of Columbia placed a lien on Killefer’s home to collect unpaid unemployment taxes on household employees.
In all three examples, the taxpayer is someone with financial sophistication and access to the best tax accountants. How can the average American hope to successfully navigate the tax code?
Our tax code is complex. It’s been compared in length to the New York City phone book. Luckily for us, if we make a mistake inadvertently, we can correct it when we, or the IRS, realize it. We would owe interest on the additional tax and, possibly, a penalty, but if it’s a simple mistake that’s the end of it.
None of the examples I provide include any allegations of fraud. Tax fraud occurs when there is intent to underpay tax. It’s a willful evasion.
The penalty for civil tax fraud is 75 percent of the underpayment attributable to fraud. It does not apply to any underpayment when the taxpayer can show reasonable cause and good faith efforts to pay the correct tax. The best example of reasonable cause is when a taxpayer acts on advice received from the IRS or a tax professional.
In a civil tax fraud case, the IRS has the burden of proof. IRS agents have many indirect methods used to prove fraud. If the issue is underreporting income, for example, agents may show there are an unexplained increases in the taxpayer’s net worth.
Anytime the IRS finds evidence of civil fraud, criminal fraud also will be considered. If the tax errors are significant and there are indications of fraud, the audit may become a criminal investigation.
A taxpayer facing civil fraud allegations should consider hiring a criminal tax attorney.
Remember Al Capone? He beat several murder charges. A tax evasion conviction finally put him in prison for 11 years.
Gina Bliss, CPA, CFE
Gina is a senior manager at EFP Rotenberg who specializes in internal audit, fraud audit, and forensic accounting. Article reprinted courtesy of The Daily Record.