Deck 16: Bankruptcy, Divorce, and Tax Fraud

Question 1

What is tax fraud

Answer 1

Tax fraud:
• In a Tax fraud, assets are being taken away and are claimed by the government.
• Tax fraud can be committed against any governmental or any other organization that collects taxes, including the federal government, state government, local government, or any other taxing authorities.
• The tax system in the United States depends on voluntary compliance, which means that each citizen is responsible for filing a tax return when required and for determining and paying the correct amount of tax.
• However, most of them recognize their legal responsibility and properly report some of them are not as honest and intentionally pay no tax or underpay. This intentional underpaying of taxes is known as tax fraud.

Question 2

What are some of the most common tax fraud schemes

Answer 2

Identify most common tax fraud schemes:
In tax fraud cases, assets are being taken away and are claimed by the government. Transfer of assets to offshore bank accounts, relatives, friends, and other hiding places are examples of tax fraud. Tax fraud is different from trying to follow complex tax rules and underpaying taxes or being aggressive in paying legal tax minimization strategies. Using a false SSN (Social Security Number), keeping two sets of financial records, hiding income or claiming a blind spouse as a dependent when the person is single are all examples of tax fraud.The most common tax fraud schemes include the following:
a. Deliberately underreporting or omitting income
b. Overstating tax deductions
c. Keeping two sets of books
d. Making false entries in books and records
e. Claiming personal expenses as business expenses
f. Claiming false deductions
g. Hiding or transferring assets or income
h. Illegal money laundering schemes

Question 3

Who usually initiates the filing of an application for retention of an investigator

Answer 3

The application is normally filed by the Creditors for retention of the Investigator, as it's a Creditor amount which is normally at the stake.

Question 4

What is money laundering

Question 5

Which of the following is not a characteristic of an affidavit of proposed investigator a. Content and extent of detail required do not vary by jurisdiction.
B) Is prepared when a fraud investigator is retained.
C) Legal document is sworn under oath and must be notarized.
D) Addressed to the court and is submitted by an attorney for the person who engaged the investigator.

Question 6

The person appointed by a bankruptcy judge in a Chapter 11 proceeding who investigates allegations of fraud or misconduct by the debtor or its principals is a(n): a. Creditor.
B) Adjuster.
C) Auditor.
D) Examiner.

Question 7

Which of the following is not a way that individuals can commit tax fraud a. Overstating the amount of deductions.
B) Keeping two sets of books.
C) Paying the least amount of taxes the individual owes.
D) Making false entries in books and records.

Question 8

To work as an entry-level CI special agent, a. You must be a U.S. citizen.
B) You must not be older than 37 years of age.
C) You must have completed a four-year course of study or earned a bachelor's degree.
D) You must meet all of the above conditions.

Question 9

Hotel worker Danny Ruiz was living with his wife and four children in a cramped New York apartment when he saw a television ad promising the family a way out. "Why rent when you can own your own home " Pennsylvania builder Gene Percudani asked. The company even offered to pay his rent for a year, while he saved for a down payment. So the Ruiz family fled the city for the Pocono Mountains, where they bought a threebedroom Cape Cod home for $171,000. However, when they tried to refinance less than two years later, the home was valued at just $125,000. "I just about flipped," said Mr. Ruiz. Later Mrs. Ruiz remarked about her husband, "He went nuts." Percudani, a 51-year-old native of Queens, New York, built a thriving homebuilding business in this market, running folksy television ads offering New Yorkers new homes in Pennsylvania. If they joined Percudani's program, called "Why Rent," homeowners would find financing through another of his companies, Chapel Creek Mortgage, which brokered loans from J. P. Morgan Chase and the company's Chase Manhattan Mortgage unit.
For years, the "Why Rent" program appealed to workers with modest salaries, such as Eberht Rios, a truck driver for UPS. Rios bought a home in the Poconos for $140,000. This year, when he tried to refinance, he was told the home was valued at only $100,000. One local appraiser, Dominick Stranieri, signed off on most of the "Why Rent" deals that state officials now say were overpriced, including the Rios and Ruiz homes. Percudani's firm picked Stranieri as his appraiser because of his quick work and low fee of $250, instead of the typical $300 to $400. In exchange for a steady stream of work, Mr. Stranieri accepted without question valuations from Percudani's company.
Other common methods of creating revenues include investors and others buying distressed properties and then, using inflated appraisals, selling them for a big profit. In order to secure the efforts of a "dirty appraiser," those involved with the fraud would pay up to $1,500 under the table on top of the appraiser's standard fee of $400.
Another unique twist to the plot is that few of the people involved in making mortgage loans have a longterm interest in them. Traditionally, bankers made loans directly and held them, giving the lenders a strong incentive to find fair appraisals to protect their interest. Today, however, many appraisers are picked by independent mortgage brokers, who are paid per transaction and have little stake in the long-term health of the loans. Many lenders have also lost a long-term interest in their loans, because they sell them off to investors. Appraisers increasingly fear that if they don't go along with higher valuations sought by brokers, their business will dry up.
Do you think a county appraiser would do a lot better than a private practitioner Joel Marcus, a New York-based attorney recently had his property valued at $2.2 million by a county appraiser, up from $2 million the previous year, which means a $7,200 jump in his property tax bill. Based on recent home sales in his neighborhood, Marcus believes his property is valued at between $1.7 and $1.8 million. Based on this information, Marcus has appealed his appraisal.
Although a good appraisal requires doing hours of legwork, visiting a property to check its condition, and coming up with at least three comparable sales, Percudani says he isn't surprised that later appraisals, or even different appraisals made at the same time, could result in different values. "Appraisals are opinions," he says. "Value, like beauty, is in the eye of the beholder." Stranieri and Percudani deny any wrongdoing and say they operated independently and that any home that declined in value did so because of a weak economy. "It's like buying a stock," Percudani says in an interview. "The value goes up. The value goes down."
Questions
1. How is an opportunity created to commit appraisal fraud Does the appraiser act alone, or is collusion routinely involved
2. How is appraisal fraud detected Is intent to deceive easy to prove in appraisal fraud
3. What pressures or perceived pressures can motivate appraisers to make faulty valuations
4. How do appraisers rationalize their fraudulent behavior
5. Why would a county perceive pressure to fraudulently inflate property values
6. What controls would help to prevent appraisal fraud
7. What natural controls exist to prevent homeowners from the desire to "massage the value" of their homes (Hint: Think about a homeowner's motivation.)

Question 10

Colleen Matthews had just turned 22 when her hard work finally started to pay off. Six months earlier, Colleen had graduated from a state university with a master's degree in accounting. Colleen graduated with honors and was one of the youngest in her class. Unlike most of the intellectuals she had studied with throughout her career, Colleen was extremely social and had great communication skills. After graduation, she took a job with a well-known regional accounting firm. The firm specialized in assisting companies with their technology problems. Colleen knew that the connections and knowledge she would gain working for the firm would be beneficial throughout her career. Now, six months after graduation, she has a full-time job offer with one of the firm's strongest clients.
Within a few days on her new job, Colleen had adapted to her new environment. Colleen and two other recent graduates were running the entire accounting department. However, it wasn't long until Colleen began to notice that something wasn't right. After a few weeks, Colleen realized that the firm's executives were participating in illegal transactions. The company executives were importing expensive technological products from China and selling them under the table to contacts unknown to Colleen. Once the firm received the products at the shipping dock, the executives' "personal employees" marked the products and took them to a separate location. The entire operation was done with little paperwork. The money received from the special products received special attention. Colleen was told to report this inflow of cash in an account called "Personal Executive Consulting Services." This allowed the executives to personally use the money at their convenience.
1. Does Colleen have a responsibility to report the apparent fraud
2. If so, to whom should she report the fraud
3. Assuming that the fraud has been continuing for several years, what would be the tax ramifications to the executives of not reporting earnings on their tax returns
4. Even though the money is from illegal sources, are the executives required to report the income on their annual tax returns
5. Earlier in the book, we discussed the net worth method. How do you think the net worth method can help prosecutors determine the extent of these executives' illegal income

Question 11

Your best friend Sue has always wanted to be an FBI agent for the U.S. government. However, because of the recent restructured changes in the FBI (due to the increased terrorism threat), Sue is uncertain whether she wants to pursue an FBI career. She feels that the FBI does not provide as much career security as she once thought that it did. Sue is excellent with numbers, taxes, law, and communication. After reading about the CI division of the IRS in this chapter, you are excited to tell Sue about it.
1. Explain the purpose and mission of the CI division.
2. Explain what other governmental agencies the CI division works with.
3. Explain the requirements for an entry-level CI special agent.

Question 12

Attorney Mark E. of Newport, Virginia, pleaded guilty to wire fraud in the Eastern District of Virginia, based on his actions of embezzling from a client in Chapter 13 bankruptcy. Mark embezzled more than $22,000 intended for payment to the client's mortgage holders under the Chapter 13 plan. Evidence of the embezzlement came to light when the debtor client complained to the Chapter 13 trustee, who notified the Newport office. After investigating, the U.S. Trustee filed a civil complaint against Mark seeking disgorgement of all fees paid by the debtor, an accounting of all monies received, a surcharge for all late fees and penalties levied against the debtor by his mortgage companies, and disbarment from practice before the bankruptcy court. During discovery, which included subpoenaing Mark's trust account records, further misconduct was discovered in unrelated cases. The allegations in the U.S. Trustee's civil complaint formed the basis of his criminal indictment. Before the criminal trial, Mark agreed to disbarment for at least five years. Which section of the Bankruptcy Code makes Mark's activities illegal

Question 13

Bill and Sue were college students when they met each other in the library and began dating. After a few short months, they decided to get married. After a time of marital bliss, both Bill and Sue discovered the relationship was not what they had planned. Bill did not like Sue's candles and stuffed animals with which she insisted on filling the house, and Sue did not care for Bill's habit of spending all his money on the lottery. So, after a few failed attempts at reconciling the marriage, both concluded that divorce would be best. Each agreed to split their assets 50-50.
Due to Sue's displeasure in seeing lottery tickets cluttering the house, Bill kept most of the tickets inside his desk on campus. A few months before the divorce, one of Bill's lottery tickets hit the jackpot, giving him a little under $1 million. Instead of depositing the money into the couple's joint account, he hid it by creating a different bank account. Bill never brought up the news to Sue, and the court did not find out about the money during the court proceedings.
1. What type of fraud did Bill commit
2. What can Sue do about this situation

Question 14

Why is fraud so prevalent in bankruptcy and divorce cases

Question 15

Bust-out schemes usually involve the concealment of assets, sales proceeds, and inventory.

Question 16

A debtor is the person or entity who is subject to a bankruptcy filing.

Question 17

A "planned bankruptcy" is usually referred to as a bust-out.

Question 18

TheU.S.Department of Treasury is a branch of the IRS.

Question 19

Visit the IRS's bankruptcy site at www.irs.gov and answer the following questions:
a. What percentage of bankruptcy petitions does the IRS estimate contain some kind of fraud
b. What are the major goals of the CI division's bankruptcy fraud program
c. Read two or three examples of bankruptcy fraud and be prepared to discuss them in class.

Question 20

When a bankruptcy takes place, who are the major participants involved

Question 21

What are some of the most common ways that fraud perpetrators conceal and transfer assets or income during bankruptcy and divorces

Question 22

Why should fraud investigators involved in bankruptcy or divorce cases be careful about what they put in their report

Question 23

How is money laundering related to other illegal activities or fraud

Question 24

Which of the following is not a type of tax fraud a. Using a false SSN.
B) Overstating income.
C) Keeping two sets of financial books.
D) Claiming a dependent when you do not have one.

Question 25

Which of the following is the least likely symptom of a bust-out a. Company's only listed address is a post office box.
B) Dramatic increase in size of credit orders.
C) Public notice of change in management.
D) Sudden decrease in inventory.

Question 26

The retention of a fraud investigator in a bankruptcy proceeding must be approved by the bankruptcy judge unless: a. The debtor's estate pays the investigator.
B) The trustee pays the investigator.
C) The creditors' committee pays the investigator.
D) An individual creditor or shareholder pays the investigator.

Question 27

The Criminal Investigation division's chief responsibility is to: a. Detect taxpayers who willfully and intentionally violate their known legal duty of voluntarily filing an income tax return.
B) Check the accuracy of tax returns.
C) Detect fraud in public corporations' tax filings.
D) Detect fraud in U.S. citizens' tax filings.

Question 28

John and Sally have recently been experiencing serious marital problems. They are seeing a counselor in order to "save their marriage." During the past several months, John has been selling their recreational assets including an expensive boat, snowmobiles, four-wheelers, and a cabin in the beautiful Smoky Mountains. John has been selling all these toys to his friend Sam for extremely low prices. Sally believes his story that he is selling them because they are hard up for money and that he is putting the money into their savings account. However, she does not know who has been purchasing the assets. She is shocked during the divorce to find out that there is very little money in the savings account.Where had it all gone She had never paid much attention to the finances and had trusted John completely.
1. In what kind of scheme are John and Sam involved
2. How could Sally verify that the assets were actually sold
3. What are some possible motivations for John to sell the recreational assets at extremely low prices

Question 29

Willy and Buck Forsythe are brothers who often engage in shady business deals and regularly swindle honest people out of their money. Willy and Buck have decided to take their business to a new level. There is a small hardware store in town with a good reputation for honesty and friendly service. With the large amounts of money they have accumulated from other schemes, Willy and Buck decide to buy the hardware store. They make the owner an offer he can't refuse, and they are soon in the hardware business. As new managers of the store, Willy and Buck make some changes. They begin to order bigger shipments from suppliers, paying them off promptly, using money acquired through loans. They sell off a lot of these shipments at cost to their unruly friend, Billy the Kid. As orders get larger and payments remain prompt, the suppliers are willing to extend more and more credit to the hardware store. Also, because it appears that business is good, the bank is willing to lend more money. Things are going just as planned for our crooked friends, Willy and Buck. Just as they had planned to do all along, when they have a lot of money on loan from the bank and have just sold huge amounts of inventory to Billy that they had purchased on credit, they file for bankruptcy. The suppliers and the bank are perplexed. Upon investigation, they find that Willy and Buck have neither the money to pay them back nor the inventory to liquidate in order to pay them. Willy and Buck have successfully "sold" their inventory or hidden their cash in other bank accounts, so it appears they don't have the means to pay back their creditors. What kind of scheme are Willy and Buck involved in, and how could the bank and the suppliers have detected it sooner

Question 30

Trek, Inc., has experienced two bad financial years, resulting in too few assets remaining to pay creditors in full. Trek, Inc., wants to file for bankruptcy. What are its options, and which one would be best for Trek, Inc.

Question 31

John Dewey is the husband of Mary Dewey. He is also the CEO of a large public relations firm. Mary recently filed for divorce, alleging mental brutality, and is asking for half of John's and the couple's assets. In the six months prior to being served for divorce, John had taken business trips to the Cayman Islands, Switzerland, Hong Kong, and Barbados. These were the first business-related trips he had ever made to these locations. When John's and the couple's assets were identified during the divorce proceedings, Mary was surprised to learn that John's and his company's net worth totaled only $50,000 and that her half would only be $25,000. She was very disappointed because, up until the divorce, John had been giving her $200,000 per year to spend. What kind of fraud is most likely occurring in this case

Question 32

After a jury trial, Charles H. and his parents, Charles M. and Helen J. of White Plains, New York, were found guilty on charges of theft of public funds, wire fraud, bankruptcy fraud, and money laundering conspiracy. The charges arose from the family's schemes to defraud and their use of bankruptcy proceedings to further those schemes. Both father and son were convicted of concealing assets from the bankruptcy trustee and creditors and making false statements under penalty of perjury. The father was also found guilty of transferring approximately $489,000 from his brokerage account to an account in the Bahamas in contemplation of bankruptcy, and the mother was found to have engaged in bankruptcy fraud by receiving property in her name to defeat the bankruptcy laws. The White Plains office assisted in the investigation and preparation for the bankruptcy aspects of the trial. If the father was to be prosecuted criminally, what fact would have to hold regarding his transfer of money

Question 33

Tax fraud can be committed against state, federal, or local governments.

Question 34

Civil bankruptcy cases are usually investigated bythe FBI and other law enforcement agencies.

Question 35

Concealment of assets typically occurs on a larger scale for individuals filing for bankruptcy protection than it does for businesses filing for protection.

Question 36

Most divorce-related fraud cases are civil rather than criminal.

Question 37

The IRS can add a 20 percent penalty to your tax bill for a careless mistake and a 75 percent penalty for tax fraud.

Question 38

To work as an entry-level CI special agent, you must be at least 29 years of age.

Question 39

What is bankruptcy What are the most common types of bankruptcy

Question 40

What are some of the most common bankruptcy fraud schemes

Question 41

What is a court-appointed or panel trustee

Question 42

What is the CI division of the IRS

Question 43

Which of the following describes a Chapter 13 bankruptcy a. All assets are liquidated and used to pay creditors.
B) Reorganizations can be used by individuals with debts less than $1 million.
C) The entity is given time to reorganize its financial affairs, settle debts, and continue operations.
D) Debtors receive all their payments up front from liquidated assets.

Question 44

Which of the following is the major reason why there is so much divorce fraud a. Assets are being taken away from one divorce partner and given to another.
B) Divorce proceedings usually take a long time.
C) States make divorces very difficult.
D) Children usually get most assets in divorce cases.

Question 45

Which of the following is not an indicator of a possible bust-out a. An address that is a post office box.
B) New ownership of a company.
C) Slow buildup of inventory.
D) Dramatic increase in the size of credit orders.

Question 46

Which of the following is not an example of tax fraud a. Using a false SSN.
B) Keeping two sets of financial books.
C) Reporting information regarding passive income.
D) Claiming a blind spouse as a dependent when you are single.

Question 47

You have been asked by a small credit union to help investigate an alleged fraud in a bankruptcy case in which it is involved. It wants you to start right away because it is worried that the debtor will destroy evidence vital to the case. The credit union has not received permission from the judge involved in the case to contract you, but it tells you that if you find fraud, there will be no problem with the judge. What should your response to this be

Question 48

Suppose you are working with the CI division of the IRS. You have recently been assigned to a case that involves a $3 million tax evasion scandal. The IRS discovered the case when it was performing a routine audit. Because the IRS believed that the case involved fraud, the IRS agent referred the case to the CI division, which has now assigned the case to you. After investigating the case, you determine that it involves significant fraud. Before prosecuting the case further, you want to review the specific laws under which fraud perpetrators are charged.
1. Identify the specific laws under which tax fraud perpetrators can be charged.
2. Explain how each of these laws relates to tax fraud.
3. In prosecuting fraud, are some laws more applicable than others Are all of the laws you listed broken when tax fraud occurs Why or why not

Question 49

As mentioned in the chapter, lawyers, creditors, and trustees can often be involved in bankruptcy fraud. Read the letter at http://www.clr.org/Safford6c04. html. It was written by a debtor to the U.S. Attorney's office. List the individuals the debtor accuses, these individuals' roles in the bankruptcy proceedings and the fraudulent behavior of which the debtor accuses them.

Question 50

BBB Company has been a successful manufacturer of quality electronics products for the past 20 years. It is a publicly traded company with 1 million shares outstanding. During the past three years, the company has fallen on hard times. Profit margins in the electronics manufacturing industry have been squeezed due to competition in Japan and China. For most of the company's history, research and development (R D) costs have been a substantial portion of expenses. However, in the last three years, there have not been any R D expenses. This may have led to the decline in perception of quality, for which customers have expressed concern.
Suppliers have also been complaining that BBB Company has bought increasing amounts of inventory on credit and has pressured them to loosen credit terms. However, the company shows a decreasing inventory over the last three years as sales have declined. Recently, the company CFO talked the local bank into increasing BBB's credit limit, and the company has used its entire line of credit. The CFO convinced the bankers that the current downturn in sales was temporary and that the company had a new product line that would be very lucrative.
With all its financial pressures, BBB recently decided to file for bankruptcy. It cannot cover the interest payments on loans, nor can it meet its growing accounts payable balance. As creditors begin to seek monetary recovery through assets, they discover that there seems to be very little inventory, and expenses seem extraordinarily high in the current year. Also, some cash (from loans) has disappeared without leaving a paper trail.
1. What evidence indicates that the company has been planning to declare bankruptcy If so, for how many years
2. If this bankruptcy was fraudulently planned and assets have disappeared, will BBB Company still be allowed to declare bankruptcy

Question 51

A person acting as an officer in a bankruptcy case is prohibited from purchasing any property of the debtor's estate.

Question 52

Debtors in bankruptcy cases have the power to sue investigators over false accusations.

Question 53

The purpose of civil laws is to "right a wrong" or send someone to jail or have them pay fines, whereas the purpose of criminal laws is to seek monetary remedies or recover stolen funds.

Question 54

The U.S. tax system is based on voluntary compliance.

Question 55

What are some of the more relevant sections of the Bankruptcy Code related to fraud

Question 56

What are some of the most common divorce fraud schemes

Question 57

What is an affidavit of proposed investigator

Question 58

Is it necessary to report illegal income (such as embezzled money) on income tax returns

Question 59

Bankruptcy courts do not have which of the following responsibilities a. Appointing trustees, examiners, and committees.
B) Supervising bankruptcy petitions.
C) Approving reorganization plans.
D) Conducting hearings and trials to resolve disputes.

Question 60

Which of the following investigative methods would most likely be used more in divorce cases than in bankruptcy cases a. Surveillance.
B) Public records searches.
C) Subpoena of private records.
D) Interviews.

Question 61

Which of the following is an indicator of possible hiding of assets in a divorce a. Assets transferred to an off-site location.
B) Changing the title to assets.
C) Payments made to fictitious individuals.
D) All of the above are indicators of possible hiding of assets.

Question 62

If an audit reveals that an individual has underpaid his or her taxes, the auditor: a. Can assess civil fines.
B) Can assess penalties.
C) Can refer the case to the CI division.
D) An auditor can do all of the above.

Question 63

You have been hired as a fraud auditor to examine the assets of a company that recently filed for Chapter 11 bankruptcy. The company manufactures and sells circuit boards for children's computerized toys. You have access to its financial statements and warehouses. The company is a closely held corporation. The company is suspected of fraudulently concealing assets. Give three red flags that you would look for to indicate fraudulent asset concealment.

Question 64

In the fall of 2001, Enron, the eighth largest corporation in the United States, declared bankruptcy unexpectedly, and investors lost approximately $60 billion. From your reading about this famous case, did Enron's bankruptcy involve fraud If so, what type

Question 65

Look up the U.S. Trustee Program's 2012 Annual Report at http://www.justice.gov/ust/eo/public_affairs/ annual report/docs/ar2012.pdf.
1. How is a trustee defined
2. What are the functions of the trustee program
3. The program routinely hires bankruptcy analysts of what two certifications
4. What initiative did the program launch in 2001 For what purpose
5. What specific actions can the program take under this initiative
6. According to the report, with what other crimes is bankruptcy fraud often connected
7. The trustee program refers criminal cases to the district attorney's office. The report separates these referrals into six categories. List the categories and provide a one-sentence description of each type of scheme.
8. List the ten duties of a U.S. Trustee

Question 66

Liz Clayton, supermodel and wife of Andrew Dyce, better known as Flash, lead guitarist and vocalist for the popular heavy metal band Flash Metal, is filing for divorce. Each cited that their careers kept them separated and that they have drifted apart over the 12 years of their marriage. The divorce settlement was quick, and both sides were pleased. Little did Liz know that Flash had been concealing assets from her over the past year. Liz didn't know much about Flash Metal, including who the current and past members were. Over the 20 years that Flash Metal has been a group, musicians have come and gone with only one original person still in the band, Flash.
When the marriage started to get rocky, Flash decided to hide some assets from Liz just in case of divorce. Over the past six months while Flash Metal was on its record-breaking world tour, Flash would take his concert profits and make a check out to a past band member to hide his income from Liz. After the divorce was settled, the checks were voided, and Flash had successfully hidden $1.2 million from his unsuspecting wife. What could Liz have done to avoid being swindled by her ex-husband

Question 67

Fraudulent transfers can occur up to two years before the debtor files for bankruptcy.

Question 68

Chapter 11 bankruptcies represent complete liquidationor shutting down of a business.

Question 69

The retention of a fraud investigator in a bankruptcy case must always be approved by the bankruptcy court's judge.

Question 70

Americans should pay the least amount of taxes they legally owe.