The Badges of Fraud

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

What are the Badges of Fraud?

Over the years, courts have developed a litany of so-called “badges” of fraud that may indicate that a taxpayer exhibited fraudulent intent.  These badges (or “flags” or indicators) of fraud may be used by the IRS as a basis to infer the existence of the level of intent necessary to assert a civil fraud penalty under Section 6663 of the Internal Revenue Code or, worse yet, to support criminal tax charges.

In evaluating the existence of fraud, courts look to the taxpayer’s entire course of conduct and no particular “badge” or indicator is essential or determinative.  In fact, in any given case, the government may consider the existence of one badge to be sufficient to establish fraud, and certainly, the existence of multiple badges together increases the taxpayer’s exposure.

The IRS has specifically recognized a thorough list of indicators of fraud over the years, and its agents are trained to identify those indicators.  A general summary of the types of indicators or badges that it looks for follows:

Some of the more common badges, broken down by the context in which they arise, include:

Indicators of Fraud

Income

Expenses or Deductions

Books and Records

Allocations of Income

Conduct of Taxpayer

Methods of Concealment

Taxpayers with indicators of fraud should consult with a tax attorney to determine what exposure, if any, they may face under their particular facts—and what options they may have to address that exposure.  Often, proactive steps may be available to minimize (and in some cases even eliminate) that exposure.  A word of warning though: As any good attorney or accountant will tell you, conversations about prior fraud should only be had with an attorney.  The federal accountant-client privilege—unlike the common law attorney-client privilege—does not provide any protection in a criminal matter, and conversations with accountants and other tax professionals who are not attorneys are unfortunately entirely unprotected in that setting.  The last thing that you want to do is to inadvertently turn your accountant into a witness against you.

 

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