Tax Fraud

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TAX FRAUD
TB 280 Slide
General Course for Revenue Officers
TMD
TOPIC 280
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 Informal
Investigation
Classification of Evidence
Rules which Govern
Documentary Evidence
Rule
TOPIC OVERVIEW
TMD
TB 280 Slide
3
OBJECTIVES
1. 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 of
fraud;
3. Familiarize and enumerate the stages and methods in
fraud investigation; and
4. Differentiate standard of proof required in criminal and
civil tax fraud cases.
TMD
TB 280 Slide
4
TAX FRAUD - is the actual evil motive or intent to evade taxes
which are legally due to government.
NEGLIGENCE - is the unintentional omission.
FRAUD - refers to deceit or trickery deliberately practiced
in order to gain some advantage; dishonesty; an
instance of such deceit, deception or artifice of
any kind, anything contrived or intended to deceive.
DEFINITION
TMD
TB 280 Slide
5
Definition - means the elimination or
reduction of ones correct and
proper tax by fraudulent means.
Purpose - minimize, reduce, eliminate tax
liability 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 the
payment or altogether eliminate
tax liability by lawful means.
- same as Tax Evasion
- resort to legal and acceptable
means
- prescribes in 3 years after the
filing of the tax return
TMD
TAX EVASION VS. TAX AVOIDANCE
TB 280 Slide
6
EXAMPLES OF TAX EVASION
1. omitting to report ones income
2. understatement of income done intentionally
3. overstatement of deduction done improperly and
intentionally
4. claiming false personal exemption
5. claiming as exempt corporations even if they are not
6. misdeclaration and underdeclaration of estate in the
estate tax return
7. making withdrawals of articles subject to excise taxes
contrary to the provisions of the Tax Code
TMD
TB 280 Slide
7
TMD
FRAUD VS. NEGLIGENCE
TB 280 Slide
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 up
some legal right.
Negligence, whether slight or gross, is not equivalent to fraud
with intent to evade the tax contemplated by the law.
It necessarily follows that mere mistake cannot be considered
as 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 of
evidence 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 reasonable
doubt and that the accused taxpayer can be charged
guilty.
TMD
TB 280 Slide
9
1. Civil penalties - 50 % surcharge imposed by BIR
2. Criminal penalties - imprisonment and/or fine
imposed by RTC
3. Extension of the prescription period up to 10 years
from date of discovery and 5 years prescription
on the filing of criminal action
4. Fraud Cases cannot be subject to compromise
5. Suspension and temporary closure of the business
operations of the taxpayer
EFFECTS OF FRAUD
TMD
TB 280 Slide
10
1. From routine examination of returns
2. From information furnished
3. Through the initiative of the revenue
officers concerned
4. Third party information
SOURCES OF FRAUD CASES
TMD
TB 280 Slide
11
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
TMD
TB 280 Slide
12
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;
TMD
TB 280 Slide
13
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;
TMD
TB 280 Slide
14
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;
TMD
TB 280 Slide
15
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;
TMD
TB 280 Slide
16
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;
TMD
TB 280 Slide
17
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;
TMD
TB 280 Slide
18
The taxpayers 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;
TMD
TB 280 Slide
19
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;
TMD
TB 280 Slide
20
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.
TMD
TB 280 Slide
21
Informal Investigation
Preparation of a Preliminary Report
Formal Fraud Investigation
PROCESSING OF A
TAX FRAUD CASE
TMD
TB 280 Slide
22
Covert / Discreet Investigation
Overt Investigation
< Open Surveillance
< Stocktaking
< Apprehension
< Raid
WAYS OF CONDUCTING PRELIMINARY
OR INFORMAL INVESTIGATION
TMD
TB 280 Slide
23
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
TMD
TB 280 Slide
24
Corroborative and cumulative evidence
Relevant evidence and material evidence
Irrelevant , incompetent, inadmissible and
immaterial evidence
Rebuttal
Substantial evidence
Competent evidence
CLASSIFICATION OF EVIDENCE
TMD
TB 280 Slide
25
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
TMD
TB 280 Slide

Tax Fraud

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