Tax evasion is a felony under the laws of almost every jurisdiction in the world because it is considered a threat to the government's ability to fund its own operations. Tax evasion can carry both civil and criminal penalties, which can be dangerous because tax rules can be quite complex and innocent mistakes can be costly for taxpayers. Fortunately, in the U.S., criminal intent must be shown in order to convict a defendant of tax evasion. This article provides a general overview of the subject from the perspective of U.S. federal law.

Distinction Between Tax Evasion and Tax Avoidance

• Tax evasion is the use of illegal means to avoid or reduce the payment of taxes legitimately owed, while tax avoidance is the use of legal means (finding loopholes or tax shelters, for example) to accomplish the same goal. Since the line between the two is sometimes not well-defined, some forms of tax avoidance are dangerous because they may be construed as tax evasion by some authorities.

Misrepresentation Versus Concealment

• Avoiding the payment of taxes through misrepresentation can be done in two ways: presenting false information and presenting true facts selectively, so as to leave a misleading impression that underestimates actual tax liability. Concealment occurs when someone hides assets or income or destroys financial records and can result in prosecution, even if the person concealing the assets or income has not yet filed a misleading tax return (prosecution commences before the filing deadline, for example).

Common Forms of Tax Evasion

• Tax evasion through concealment is nearly universal in illegal industries such as drug trafficking, where complying with tax law by admitting income from illegal sources would result in admitting guilt to another, more serious crime. Avoidance of import duties by misrepresenting the nature or value of an imported product is also particularly common.

Common Examples of Tax Evasion The most common type of income tax evasion occurs when an individual taxpayer or a business deliberately under reports taxable income for a particular tax year. People who routinely deal in cash transactions, such as handymen, restaurant owners, hairdressers, and car dealers often fail to report substantial portions of their income, which, in turn, gives them a decreased tax liability. However, doctors, lawyers, accountants, and other professionals are equally guilty of failing to report their taxable income accurately, particularly when they are self-employed.

Another common type of income tax evasion involves false deductions for business-related expenses. For instance, a business owner who claims on his tax return that every meal eaten in a restaurant and every concert attended in a given year is deductible as a business-related expense is probably overstating his deductible business expenses. By including personal food and entertainment expenses, this business owner is claiming expenses that are not legally deductible on an income tax return.

Other common types of tax evasion involve the following actions:

• claiming charitable deductions that were never made
• overstating the value of donated property in order to increase charitable deductions
• omitting property from a tax return
• receiving cash income and failing to report it on a tax return
• intentionally understating the value of an estate on a tax return

Each of these actions is illegal, and may lead to prosecution for the crime of tax evasion.

Failure to File a Tax Return

• Failure to file a tax return can subject a taxpayer to civil penalties of up to 25 percent of the tax due. Willful failure to file a tax return can subject a taxpayer to one year in prison for every year in which a return is not filed (subject to a six-year statute of limitations).

Legal Standards

• In order to violate U.S. federal criminal prohibitions against tax evasion, a person must have: an unpaid tax liability; perform an act that evades or attempts to evade either assessment or payment of the tax: and specifically intend to violate a known tax obligation (negligence cannot result in liability for tax evasion but can give rise to civil liability). Individuals can be prosecuted for avoiding paying their own taxes or for causing a corporation to avoid paying its taxes.
  

Penalties

• In the U.S., tax evasion is punishable by a fine of up to $100,000 ($500,000 for corporations) and/or imprisonment for up to five years. In addition, back taxes and costs of prosecution can be assessed. Since an individual can be charged with more than one count of tax evasion, the foregoing numbers underestimate an individual defendant's actual civil and criminal liability.

CRIMINAL INVESTIGATION:

IRS Investigation of Tax Evasion The Criminal Investigation Division (CID) of the IRS is responsible for investigating all tax-related crimes. One of the major areas of financial investigation is legal source tax crimes, which includes tax evasion. The crime of tax evasion is considered a legal source tax crime because it typically involves a legal job or business, and income that a person has earned legally. Tax evasion also is referred to as white-collar crime, since it is a financial violation that is committed by a person who usually is not engaged in any other types of criminal activities. CID devotes most of its resources to legal source tax crimes.

Prosecution and Conviction for Tax Evasion Once CID has completed its investigation, it refers the case to the Civil Tax Division of the U.S. Department of Justice for prosecution. Ultimately, the Department of Justice will determine whether to pursue the case further. Typically, federal prosecution of tax evasion is reserved for the most high-profile cases where large amounts of taxes are owed to the federal government.

New York (November 18, 2011)
By Michael Cohn, Accounting Today

Small businesses and nonprofit organizations often overlook the warning signs of employee fraud, especially by senior managers, according to accounting firm Marks Paneth & Shron.

The firm advises management and board members to recognize the red flags and act early to stop fraud.

“Organizations pay a high price for fraud,” said Sareena Malik Sawhney, a forensic accountant who serves as a director in the Litigation and Corporate Financial Advisory Services Group at the New York-based accounting firm. "The damage can be particularly severe at small organizations where losses can be extremely threatening. These organizations often do not have the systems in place to detect fraud and prevent or limit their losses."

According to the Association of Fraud Examiners 2010 Report to the Nations on Occupational Fraud and Abuse, the typical organization loses 5 percent of its annual revenues to fraud. Frauds last a median of 18 months before being detected.

The report found that frauds committed by senior executives or owners were more than three times as costly as frauds committed by managers, and more than nine times as costly as employee frauds. Executive-level frauds also took much longer to detect.

“There are warning signs for the most common types of fraud,” said Sawhney. “If management and board members recognize them, they will be better able to detect fraud early and prevent or minimize the losses.”

She warned of signs of fraud such as shrinking inventories. "Skimming is defined as diverting funds before they get recorded into an organization's books,” she noted. “For example, employees often skim funds by pocketing customers' checks and trying to cash them, but customers will complain if they don't receive their goods, so the employee ships them. The result is that goods disappear from inventory, but no sale has been recorded. Inventory comparisons can reveal the fraud, as can analytical procedures such as gross profit analysis."

Bank deposits that don't match cash receipt records are another telltale sign. “Cash larceny involves diverting funds after they're on the books—it's clearly outright theft,” she said. “An example might be an employee who steals checks or cash before they can be deposited at the bank. The best detection method is to compare receipt records to deposits. Data analysis software can help an organization check for this kind of fraud.”

Checks made payable to an employee, an unknown person, an unapproved vendor, or “cash,” are another warning flag "Any of these are signs of a kind of check fraud known as a 'forged maker scheme' where an employee intercepts, forges or alters one of the organization's own checks,” said Sawhney. “Usually, the check is made out to the employee, but it might be made out to an accomplice, an unknown vendor, or simply to cash. Strange endorsements can also be a sign of fraud, as can missing checks or missing disbursement documentation."

She said organizations should also beware of payroll fluctuations—or poorly documented employees on the payroll. "In a payroll scheme, fictitious employees are added to the company's payroll. If you find unusual fluctuations in payroll, or employees with minimal or no personnel records, or employees with missing social security numbers receiving payroll checks, you should suspect payroll fraud,” said Sawhney. “High overtime for a particular job category can be a red flag, as can discrepancies between net payroll and payroll checks issued."

Changes—or unusual patterns—in employees' expenses are another red flag. “It's common for employees to commit fraud by inflating their expenses or submitting fictitious expense reports,” warned Sawhney. “Look for unusual fluctuations or changes in patterns in employees' expenses. Also watch for expenses that end in round numbers, recurring expenses for the same amount, and expenses that fall just below the reimbursement limit. This is another area where data analysis software can reveal the patterns and help detect the fraud.”

I had an individual come into my office wanting $1 million dollars for him to invest in the stock market. High returns of 34 - 40 %. And he could turn it around and start paying us big returns in ten days. Too good to be true? If it is - run in the other direction and get away from them. Never put your money at risk on people giving you high returns and stories that are just too good to be true. If you feel you have been scamed, let us know. Or if you know of anyone trying to pull a scam send an e-mail to: mlodge@vqrginc.com

Let's look at what a Ponzi scheme is really all about. Let's see what the United States Securities and Exchange Commission has described it:

 A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

Why do Ponzi schemes collapse?

With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

How did Ponzi schemes get their name?

The schemes are named after Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. At a time when the annual interest rate for bank accounts was five percent, Ponzi promised investors that he could provide a 50% return in just 90 days. Ponzi initially bought a small number of international mail coupons in support of his scheme, but quickly switched to using incoming funds to pay off earlier investors.

Does the SEC investigate Ponzi schemes?

The SEC investigates and prosecutes many Ponzi scheme cases each year both to prevent new victims from being harmed and to maximize the recovery of assets to investors. The majority of such cases are brought as emergency actions, which often seek a temporary restraining order and an asset freeze.

During FY 2010, the SEC filed 47 enforcement actions involving Ponzi schemes or Ponzi-like payments.

Who is Bernie Madoff?

Bernard L. Madoff, who is currently serving a 150-year sentence in federal prison, orchestrated a multi-billion dollar Ponzi scheme that swindled money from thousands of investors. Unlike the promoters of many Ponzi schemes, Madoff did not promise spectacular short-term investment returns. Instead, his investors’ phony account statements showed moderate, but consistently positive returns — even during turbulent market conditions.

In December 2008, the SEC charged Bernard Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for the multi-billion dollar Ponzi scheme he perpetrated on advisory clients of his firm for many years. The SEC filed emergency motions to freeze assets and appoint a receiver, and worked to return as much money as possible to harmed investors.

Madoff had been a prominent member of the securities industry throughout his career. He served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market’s board of governors and its executive committee and served as chairman of its trading committee. Madoff founded his investment advisory firm in 1960.

How is the SEC responding to its Office of Inspector General’s reports on the Madoff fraud?

In August and September 2009, the SEC’s Office of Inspector General issued three reports on the Madoff fraud, including one entitled Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme. The SEC has closely analyzed the reports.

Even before the release of these reports, major efforts were underway to make improvements and address the shortcomings that were identified in the reports. A list of decisive and comprehensive steps the SEC is taking to reduce the chances that similar frauds will occur or be undetected in the future is available on the SEC’s Post-Madoff Reforms web page.

What are some Ponzi scheme “red flags”?

Many Ponzi schemes share common characteristics. Look for these warning signs:

High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.

Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.

• Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
• Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
• Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.
• Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.
• Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.

If you are aware of an investment opportunity that might be a Ponzi scheme, contact the SEC by phone at (800) 732-0330 or online at http://www.sec.gov/complaint.shtml.What steps can I take to avoid Ponzi schemes and other investment frauds?

Whether you’re a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.

The SEC sees too many investors who might have avoided trouble and losses if they had asked questions from the start and verified the answers with information from independent sources.

When you consider your next investment opportunity, start with these five questions:

Is the seller licensed?

• Is the investment registered?
• How do the risks compare with the potential rewards?
• Do I understand the investment?
• Where can I turn for help?

For more information, read Investing Smart from the Start: Five Questions to Ask Before You Invest.What are some of the similarities and differences between Ponzi and pyramid schemes?

Ponzi and pyramid schemes are closely related because they both involve paying longer-standing members with money from new participants, instead of actual profits from investing or selling products to the public. Here are some common differences:

 Pyramid Scheme

Ponzi Scheme

Typical “hook” Earn high profits by making one payment and finding a set number of others to become distributors of a product. The scheme typically does not involve a genuine product. The purported product may not exist or it may only be “sold” within the pyramid scheme. Earn high investment returns with little or no risk by simply handing over your money; the investment typically does not exist.

Payments/profits Must recruit new distributors to receive payments. No recruiting necessary to receive payments. Interaction with original promoter Sometimes none. New participants may enter scheme at a different level. Promoter generally acts directly with all participants.

Source of payments From new participants – always disclosed. From new participants – never disclosed.

Collapse Fast. An exponential increase in the number of participants is required at each level. May be relatively slow if existing participants reinvest money.

We are currently conducting a fraud audit for a client. Where an employee / Officer of the company skimmed cash from the corporation and cheated out his partners. What is skimming?

Examples

• A skimming crime may be simple tax evasion: the owner of a business may fail to "ring up" a transaction and pocket the cash, thus converting a customer's payment directly to the owner's personal use without accounting for the profit, thereby the owner avoids paying either business or personal income taxes on it. A famous example of this crime occurred at Studio 54 discotheque[2], which was forced to close as a result.

• Skimming may additionally be the direct theft of the cash; in addition to hiding it from tax authorities, the perpetrator hides the taking from an employer, business partners, or shareholders. A large scale such allegation has been leveled at Satyam Computer Services concerning the billion dollars missing from the company's coffers.[3]

• Skimming may be necessitated by a third crime; for example, an otherwise honest businessman who pays taxes and does not cheat his partners might still be forced to skim some cash from the business and use it to give to an extortionist in the form of a bribe, kickback, or payment to a protection racket or loan shark or even a blackmailer.

• Other related usages can include things such as corrupt government officials in a poor country "skimming" cash received as foreign aid[4]

So fraud happens in a lot of businesses right under the nose of many individuals. It is one of the biggest criminal acts that happens a lot within small comapnies where the controls are not tight enough to make sure that everything is accounted for. Anything skimmed over $500 is a felony and could be time served in jail.

If you feel you don't have tight enough controls, consult VisionQwest Accountancy Group or your own personal accountant.

If you suspect there is skimming and want our firm to look at your concerns, just let us know. Contact me at mlodge@vqrginc.com

VisionQwest Accountancy Group

mlodge@vqrginc.com