When the IRS investigates suspected tax fraud, it relies on a set of warning signs known as the “badges of fraud.” These are patterns of behavior, actions, or circumstances that suggest a taxpayer may have intentionally tried to evade taxes or mislead federal authorities. At Sigal Law Group, we regularly defend clients facing federal tax crime investigations. We know how critical it is to understand these indicators and how to respond if you're under scrutiny.

What Are the Badges of Fraud?

The badges of fraud are not, by themselves, proof of criminal conduct. Instead, they serve as red flags that prompt investigators to dig deeper. The more badges present in a case, the more likely the IRS is to pursue aggressive civil or criminal penalties. Below are some of the most common badges federal investigators look for:

• Understatement or Omission of Income: Failing to report all sources of income or consistently underreporting income over multiple years.
• Fictitious or Improper Deductions: Claiming deductions for expenses that never occurred or disguising personal expenses as business deductions.
• Accounting Irregularities: Keeping two sets of books, making false entries, or maintaining inadequate records.
• Obstructive Conduct: Destroying records, making false statements, refusing to cooperate with auditors, or transferring assets to hide them.
• Implausible Explanations: Offering inconsistent or unbelievable explanations for financial discrepancies.
• Concealment of Assets: Hiding bank accounts, brokerage accounts, or other property, especially through the use of nominees or shell entities.
• Excessive Cash Transactions: Dealing heavily in cash when not typical for the business or failing to deposit receipts in business accounts.
• False Documentation: Submitting false affidavits, fake W-2s, or other fraudulent documents to support claims on a tax return.

Why Do Badges of Fraud Matter?

If the IRS can prove by clear and convincing evidence that your tax underpayment was due to fraud, you may face a civil penalty of 75% of the underpayment and potentially criminal prosecution, which can lead to prison time. The government will look for patterns, not isolated mistakes, and will scrutinize your conduct before and after filing your return.

Facing a Federal Tax Fraud Investigation?

Don't wait until it's too late. If you're under investigation or have received an IRS audit letter, contact Sigal Law Group immediately. Our experienced criminal defense attorneys can help you navigate the process, protect your rights, and build a strong defense against allegations of tax fraud. Your future and freedom may depend on it.