How to Prove Fraud Using Tax Returns

Most of the posts in this blog detail current cases and trends in the law. Today we are doing something different. We are sharing some of wisdom on how to prove fraud using tax returns.

If you are suing someone for fraud, it is fair to assume that the person you are suing is dishonest. If they did something bad enough for you to file a lawsuit, what makes you think you can trust their conduct during the lawsuit.

In a typical lawsuit, much of the case revolves around “discovery.” That is where the lawyers from both sides get to ask questions, seek production of documents and question witnesses under oath. Often in a fraud case, the victim will demand copies of the wrongdoer’s tax returns.

Those returns are useful for many reasons but don’t be fooled by what you receive. Because tax forms are online, even a child can fill in the blanks and print out a tax return. How do you know it is the same return filed with the IRS?

Believe it or not, few lawyers ever check. They are satisfied when opposing counsel sends over a couple PDFs purporting to be their client’s tax return.

First, by requesting metadata when conducting discovery, it is fairly easy to determine when a document was created. If the return was just prepared but relates to a tax period from years ago, be skeptical. Perhaps it was just reprinted. But it also could be a fake.

The importance of obtaining a debtor’s tax return when trying to locate assets has been discussed in print by experts on the subject at length. Tax returns truly are treasure troves of information. But the importance of the tax return is in what it contains, and what to look for; the skilled asset recovery professional must first be sure they are looking at the debtor’s real tax return. Phony returns are as old as the tax code and anyone willing to skip out on debt is a prime candidate for having more than one set of returns.

As a former law enforcement officer and tax prosecutor, I have encountered countless situations where the tax return that is filed with the IRS is much different than the copy of the return that was given to the bank when the debtor was applying for a car loan. Having two different tax returns is a crime. File the false return with the tax authorities and you are guilty of a felony crime. Provide a copy of fraudulent return to a lender and you are guilty of bank fraud.

Conventional wisdom says that folks will want to minimize their income when paying taxes but maximize their income when applying for credit. And it is pretty easy to create a third set of returns when ordered by a court to provide tax returns to a creditor.

How to Verify Tax Returns

Hopefully, we now agree that it is vital to make sure the returns we were provided are copied of the original. But how do we do that? How can we be sure the tax return being reviewed is the original?

First, obtain a copy of the return directly from the defendant. If there is a false return floating around, the one you obtain directly from the judgment defendant is most likely the false one.

Once you have what the return provided by the defendant, obtain a copy directly from the IRS. Anyone can obtain a copy of the actual return directly from the IRS. The fee is $50 per return and the IRS maintains the current year and 6 years prior.

To obtain the return, you need to complete IRS Form 4506 and have the taxpayer (judgment debtor) sign. Complete the form so that the returns are sent directly to you. (IRS transcripts are free but there is more value in having a copy of the signed return.)

If the debtor refuses to sign, the act alone is a huge red flag suggesting the return already in your possession is false. Should the debtor refuse to sign the release form, a court can order the debtor to sign. Once, in Illinois a debtor was so adamant about not signing that the court appointed a receiver for the limited purpose of signing the IRS document request form. Magically, the case settled immediately. We will never know what was on those returns but the debtor suddenly could not pay fast enough.

We also recommend obtaining a copy of the defendant’s IRS transcript. These are free and can be obtained by using IRS form 4506-T. Unlike a copy of the actual return, the transcript The transcript is a line-by-line printout of specified information from the tax return. This information typically includes wage and income information, bank account info and tax payment records.

There is no fee for transcripts, they are very fast and are available for up to 8 years. Once again, the defendant must sign the form.

Finally, tax return copies can be obtained by subpoena from any lender doing business with the debtor. Unless the debtor pays cash for everything, most people have car loans, mortgages, consumer loans and credit cards. If there is a debt, there is probably a loan application complete with tax return copies in the lender’s possession.

Extra work is worth the effort

Is this extra work necessary? If dealing with a fraudster, yes. Fraudsters are like rats. They hide from light. Shining a spotlight on multiple versions of the same return usually prompts meaningful settlement offers and exposes the fraudster to criminal prosecution. More importantly, it helps us identify hidden assets and bank accounts. Many times I have found brokerage accounts and the like on the real return that were conveniently omitted from the “copy” provided to me directly by the judgment debtor. And once a judge discovers the debtor is playing games, the courts are more likely to utilize their creativity and vast contempt power to see justice done.

Are You the Victim of Fraud?

We typically limit the cases we take to situations where our clients have suffered an out-of-pocket loss of $5 million or more. We do make exceptions in cases involving stockbroker fraud (investment fraud), accounting malpractice and legal malpractice.

To learn more, contact us online, by email or by phone 414-704-6731. All inquiries are protected by the attorney-client privilege and kept confidential.