tax fraud
TRANSCRIPT
2
• Definition of Terms • Conceptual Nature of Fraud• Distinction between Tax
Evasion and Tax/Avoidance/Fraud and Negligence
• Classification of Tax Fraud• Burden of Proof in
Establishing Fraud• Effects of Fraud• Sources of Fraud Cases
• Indications of Fraud• Processing of a Tax
Fraud Case• Ways of Conducting
Preliminary or InformalInvestigation
• Classification of Evidence• Rules which Govern
Documentary Evidence Rule
TOPIC OVERVIEW
General Course for Revenue OfficersTMD
TB 280 Slide
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OBJECTIVES1. Understand the basic principles in tax fraud, such as
elements of tax fraud or tax evasion, their classification and related techniques;
2. Identify the sources of tax fraud cases and indications offraud;
3. Familiarize and enumerate the stages and methods infraud investigation; and
4. Differentiate standard of proof required in criminal andcivil tax fraud cases.
General Course for Revenue OfficersTMD
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TAX FRAUD - is the actual evil motive or intent to evade taxeswhich are legally due to government.
NEGLIGENCE - is the unintentional omission.
FRAUD - refers to deceit or trickery deliberately practicedin order to gain some advantage; dishonesty; aninstance of such deceit, deception or artifice ofany kind, anything contrived or intended to deceive.
DEFINITION
General Course for Revenue OfficersTMD
TB 280 Slide
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Definition - means the elimination orreduction of one’s correct andproper tax by fraudulent means.
Purpose - minimize, reduce, eliminate taxliability to the payment of tax
Instrument - Illegal means
Manner of Assessment - Prescribes in 10 years from
the discovery of the falsity, fraud or omission
- is the attempt to minimize thepayment or altogether eliminatetax liability by lawful means.
- same as Tax Evasion
- resort to legal and acceptablemeans
- prescribes in 3 years after thefiling of the tax return
General Course for Revenue OfficersTMD
TAX EVASION VS. TAX AVOIDANCE
TB 280 Slide
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EXAMPLES OF TAX EVASION
1. omitting to report one’s income2. understatement of income done intentionally3. overstatement of deduction done improperly and
intentionally4. claiming false personal exemption5. claiming as exempt corporations even if they are not6. misdeclaration and underdeclaration of estate in the
estate tax return7. making withdrawals of articles subject to excise taxes
contrary to the provisions of the Tax Code
General Course for Revenue OfficersTMD
TB 280 Slide
7General Course for Revenue OfficersTMD
FRAUD VS. NEGLIGENCE
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The fraud contemplated by law is actual and not constructive.It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to induce another to give upsome legal right.
Negligence, whether slight or gross, is not equivalent to fraudwith intent to evade the tax contemplated by the law. It necessarily follows that mere mistake cannot be consideredas fraudulent intent.
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CLASSIFICATION OF TAX FRAUD
1. CIVIL FRAUD - is one where the accused cannot be proven beyond reasonable doubt to be guilty, though, a little more than a mere preponderance ofevidence but short of being beyond reasonable doubt, the fact of fraud can still be proven.
2. CRIMINAL TAX FRAUD - is one when all the elements of fraud can be proved beyond reasonabledoubt and that the accused taxpayer can be chargedguilty.
General Course for Revenue OfficersTMD
TB 280 Slide
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1. Civil penalties - 50 % surcharge imposed by BIR2. Criminal penalties - imprisonment and/or fine
imposed by RTC3. Extension of the prescription period up to 10 years
from date of discovery and 5 years prescriptionon the filing of criminal action
4. Fraud Cases cannot be subject to compromise5. Suspension and temporary closure of the business
operations of the taxpayer
EFFECTS OF FRAUD
General Course for Revenue OfficersTMD
TB 280 Slide
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1. From routine examination of returns
2. From information furnished
3. Through the initiative of the revenueofficers concerned
4. Third party information
SOURCES OF FRAUD CASES
General Course for Revenue OfficersTMD
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� Maintaining two sets of books and records;
� Concealment of assets;
� Destruction of books and records;
� Large or frequent currency transactions;
� Paying fictitious companies or persons;
� False or altered entries of documents;
� Over declaration of purchases or under declaration of sales;
INDICATIONS OF FRAUD
General Course for Revenue Officers
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� Use of false names or nominees;
� Large company loans to employees or other persons;
� Payee names on checks left blank and inserted at a later date;
� Excessive billing accounts;
� Excessive spoilage or defects;
� Double payments on billing;
General Course for Revenue Officers
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INDICATIONS OF FRAUD
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� An individual negotiating checks made to a corporation;
� Second or third-party endorsement on corporate checks;
� Excessive use of exchange checks or clearing accounts;
� Personal expenses paid with corporate fund;
General Course for Revenue OfficersTMD
TB 280 Slide
INDICATIONS OF FRAUD
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� An understatement of income attributable to specific transactions and denial by the taxpayer of the receipt of the income or inability to provide a satisfactory explanation for its omission;
� Substantial unexplained increases in net worth over a period of years;
� Failure to file a return especially for a period of several years, although substantial amounts of income were received;
General Course for Revenue OfficersTMD
TB 280 Slide
INDICATIONS OF FRAUD
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� Concealment of bank accounts, brokerage accounts, and other property;
� Inadequate explanation for dealing in large sums of currency, or the unexplained expenditure of currency (especially when in a business not calling for large amount of cash);
� Failure to deposit receipts to business account contrary to normal practices;
� Claiming fictitious or improper deductions;
General Course for Revenue OfficersTMD
TB 280 Slide
INDICATIONS OF FRAUD
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� Substantial amounts of personal expenditures deducted as business expenses;
� False entries or alterations made on the books and records, backdated or postdated documents, false entries on invoice or statements, or other false documents;
� Failure to keep records, especially if put on notice by the BIR as a result of prior examination, concealment of records, or refusal to make certain records available;
General Course for Revenue OfficersTMD
TB 280 Slide
INDICATIONS OF FRAUD
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� Distribution of profits to fictitious partners;
� False statements, especially if made under oath about a material fact involved in the investigation;
� Attempts to hinder the investigation, failure to answer pertinent questions or repeated cancellations of appointment, avoiding the investigator;
General Course for Revenue OfficersTMD
TB 280 Slide
INDICATIONS OF FRAUD
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� The taxpayer’s knowledge of taxes and business practices where numerous questionable items appear on the returns;
� Destruction of books and records, especially after the investigation was started;
� Transfer of assets for purpose of concealment;
� Involvement in illegal activity (illegal income);
� Failure to disclose all relevant facts;
General Course for Revenue OfficersTMD
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INDICATIONS OF FRAUD
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� Unsubstantiated or unexplained wealth;
� Mental handling of ones affair to avoid keeping records usual in transactions of the same kind;
� Keeping no records or inadequate records despite substantial transactions in the return;
General Course for Revenue OfficersTMD
TB 280 Slide
INDICATIONS OF FRAUD
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� Standard of living of the taxpayer such as possession of luxurious cars, mansions, expensive jewelries, etc; and
� Any conduct or action that would be to mislead or to conceal material facts.
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INDICATIONS OF FRAUD
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Informal Investigation
Preparation of a Preliminary Report
Formal Fraud Investigation
PROCESSING OF A TAX FRAUD CASE
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Ê Covert / Discreet Investigation
Ë Overt Investigation
a Open Surveillancea Stocktakinga Apprehensiona Raid
WAYS OF CONDUCTING PRELIMINARYOR INFORMAL INVESTIGATION
General Course for Revenue Officers
TMD TB 280 Slide
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+ Direct and circumstantial evidence
+ Prima facie and conclusive evidence
+ Object (Real ) evidence
+ Documentary evidence
+ Testimonial evidence
+ Expert evidence
+ Primary evidence and secondary evidence
+ Positive and negative evidence
CLASSIFICATION OF EVIDENCE
General Course for Revenue OfficersTMD
TB 280 Slide
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+ Corroborative and cumulative evidence
+ Relevant evidence and material evidence
+ Irrelevant , incompetent, inadmissible and immaterial evidence
+ Rebuttal
+ Substantial evidence
+ Competent evidence
CLASSIFICATION OF EVIDENCE
General Course for Revenue OfficersTMD
TB 280 Slide
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� The Best Evidence Rule (Sec.3-4, Rule 130)
� The Second Evidence Rule (Sec. 5-8, Rule 130)
� The Parol Evidence Rule (Sec.9, Rule 130)
� Rule on Authentication and Proof of Documents(Sec.19-33, Rule 132)
Rules which Govern Documentary Evidence Rule
General Course for Revenue OfficersTMD
TB 280 Slide