Taxes: Guilty Until Proven Innocent

Taxes: You’re guilty until you prove yourself innocent.

That’s the way it works with the Internal Revenue Service. You have to be able to prove the numbers on your income tax return. If you can’t, the IRS auditor will pick a number and it’s up to you to prove them wrong.

It sounds unfair, doesn’t it?

Of course it does, but that’s the way the law works in the U.S. In normal criminal cases, you’re presumed innocent until the government proves you guilty. In tax cases, it’s the other way around.

Taxpayers run into trouble when they don’t have documentation to support the numbers on their tax return. What if the IRS believes a business has unreported income? Maybe the company has bad documentation. The IRS may use bank records to prove their case, assuming that all of the deposits are revenue. They may make an assumption that additional revenue was not deposited and was concealed. They have all sorts of methods to calculate what they think these numbers are.

That’s where a forensic accountant comes in. She can help shoot holes in their theories and their methods. Things get complicated quickly, and you need an expert who is well-versed in the methods the IRS uses to calculate income.

I help attorneys evaluate the numbers in tax cases (either civil or criminal) and challenge the government’s numbers.

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Should You Investigate Suspected Fraud?

When an internal fraud (one committed by employees) occurs at a company, the natural reaction is to assume that an investigation must be started immediately. After all, it is important to determine who was involved, exactly how the fraud was committed and covered up, and what evidence exists to prove the fraud. Intuitively, that makes … Read more Should You Investigate Suspected Fraud?

Finding Skimming Schemes

Schemes that involve the skimming of money are very difficult to detect, investigate, and ultimately prove. These types of schemes are carried out before money is recorded in a company’s accounting system. Because of this “off-books” nature of the crime, little to no trail is created for investigators to follow.

Skimming happens at the point of entry of money into a business. The gatekeeper who receives those funds is the most likely person to steal the money. Typical jobs that might involve access to funds in this way include bank teller, waitress, store cashier, salesperson, or medical billing clerk. Hundreds of jobs could afford someone an opportunity to skim funds from a company, but these common examples illustrate the ease of theft but the difficulty of investigation.

Imagine a case involving a waiter or waitress who takes an order from a customer, which includes an appetizer, a meal selection, and a beverage. The customer receives all the food and pays for all the food, but the server has not entered the appetizer into the cash register, and instead pockets that part of the customer’s payment. This is a simple example of how easily a skimming scheme can be carried out.

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Why Does Bankruptcy Matter During the Hiring Process?

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It’s difficult to know who is going to commit fraud at a company. In 89% of internal fraud cases (fraud committed by employees of a company), the perpetrator was never previously charged or convicted of a fraud-related offense. So there is very little direct evidence that someone is more likely to commit fraud when they come to work for you.

That is why we look for red flags… signs that someone may be more likely to engage in fraud. We call these personal red flags of fraud, and there are literally hundreds of them that could indicate a greater propensity toward fraud. While companies have to be careful in the hiring process to not discriminate against protected classes, they most certainly can consider legal troubles (particularly of a financial nature) when hiring someone who is going to have access and/or control over budgets and money.

This topic came to my attention as the City of Milwaukee encounters an interesting turn in their quest to hire a new Health Commissioner. One of two finalists for the position, Jeanette Kowalik, has had some significant financial troubles that were reported yesterday in the local newspaper. Ms. Koawalik filed for Chapter 7 bankruptcy in both 2003 and 2014. Chapter 7 bankruptcy allows the filer to clear unsecured debts, but not debts secured with collateral (like a home) or student loans. She also lost a home to foreclosure in 2014.

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The Fraud Investigation Report

Reporting the findings of a fraud investigation will require varying levels of detail and precision, depending on the specifics of the engagement. Yet it is fairly easy to develop a standard reporting process that can be followed by staff.

One option in some cases is providing an oral report to the client and counsel. This is not the most common way to report on the findings of a fraud investigation. However, it is appropriate in certain cases, such as ones in which legal counsel does not yet want a discoverable report in the file.

The results of a fraud investigation are usually detailed in a written report. When writing a report, the fraud investigator must remember who will be reading the report. It is important to consider that even though today the report may only be for a company’s internal purposes, somewhere down the road the report may be used by law enforcement or in court proceedings. So it is important to know the current audience for an investigation report, but it is also imperative to consider who might need the report in the future.

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What Does This Forensic Accountant Do?

I spend lots of time telling people what I do in my role as a forensic accountant. Put simply, I do fraud investigations (often for the victim, but sometimes the accused hires me), divorce financial analysis, and damages calculations for insurance and litigation matters.

But sometimes I find it’s fun (and necessary!) to talk about what I do NOT do. Here are a few things I don’t do:

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Terrence Howard and the Case of the Missing Spousal Support

Empire star Terrence Howard illustrates why it’s so important to pay up when the court orders you to pay spousal support. His divorce from Michelle Ghent has been interesting for years. Back in 2012, Howard signed a spousal support agreement, but later he said that he only signed it because Ghent was blackmailing him. A judge believed him and threw out the agreement.

Ghent appealed, and last year she won that appeal. The agreement was reinstated, so spousal support was back on.

And apparently Terrence Howard is awfully far behind in his payments to Ghent. Their agreement called for support of $5,800 per month plus additional amounts (up to $4 million per year!) depending on his earnings. Ghent is going to court to ask for $909,418 in back support. She says he hasn’t paid what he owes since she won the appeal, and that he’s hiding his income from the Empire series. She says he’s made $9.7 million from the show over the last 5 years.

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Industry Red Flags of Fraud

Have you ever thought about the fact that a particular industry in which a company operates creates risk factors for fraud? We call these industry red flags, and Tracy discusses some of the more common ones in this video, including: Performance substantially out of line with competitors (either much better or much worse than others … Read more Industry Red Flags of Fraud