ITS 4450 - Fraud Risk Assessment Tools and Investigation
Chapter 16, Bankruptcy, Divorce, and Tax Fraud
This lesson presents material from chapter 16. Objectives
important to this lesson:
Reasons fraud appears in these cases
Civil and criminal bankruptcy fraud
Examples of schemes
Tax fraud and examples
Money laundering
Concepts:
Chapter 16
The story at the beginning of this chapter is not very
enlightening, so let's start with the overview section on page 576. The
analysis one that page is reasonable. When one is going through
bankruptcy, being divorced, or being taxed, there may be resentment
about assets that will be transferred to someone else. In each case,
the entity taking your assets is probably someone you have no affection
for. It makes sense that many people would try to hide assets to avoid
their being lost as part of the penalty/settlement/bill. However, an
untruthful accounting of assets in each case is an act of fraud.
The text goes on to explain that fraud in the three categories
many be a civil or criminal offense.
bankruptcy fraud
criminal - investigated by law enforcement, possibly by
the FBI
civil - investigated by trustees, examiners, creditors,
or committees appointed by a court
divorce fraud
criminal - investigated by law enforcement, possibly by
the FBI
civil - investigated by trustees, examiners, creditors,
or committees appointed by a court
tax fraud - usually
criminal cases, investigated by law
enforcement at the appropriate level; in the case of the IRS, it is
their Criminal Investigation division; typically, civil cases have a
lower threshold of proof, but they will not have prison terms as
penalties
The text also observes that bankruptcy and divorce can relate
to fraud in different ways:
they can take place because a partner has committed a
fraud, and the other partner wants out of the relationship
the fraud can take place during
the bankruptcy or divorce,
as you probably imagined when you read the first paragraph
the bankruptcy or divorce can occur to establish fraudulent
accounts and records as accepted versions of the truth; the information
goes in the court records, and the fraud is assumed to be fact
The text moves on to tax
fraud, and discusses it mainly from
the perspective of the US Internal Revenue Service. The text informs us
that a significant mistake on a tax return might result in a 20%
penalty, but a fraudulent return would probably result in a 75%
penalty. (The penalties are in addition to the tax already owed.)
As the lawyer in the video above describes, the IRS can choose
to prosecute under civil laws, criminal laws, or both.
Tax fraud comes in many varieties, but there is a common
theme. Table 16.1 presents seven
laws that specify particular offenses. Those laws also specify the
fines and prison time associated with each type of offense. We do not
need to memorize them to avoid breaking those laws. The basic advice
would be to pay your taxes honestly and there should be no trouble. The
text presents a series of cases in which this did not happen. The text
presents a list of common tax fraud schemes on page 580. They really
come down to someone lying about income, deductions, or expenses.
The text moves on to discuss the adversarial nature of a
divorce, using the colorful phrase "divorce wars". (Sounds like a
reality TV show.) There are no additional facts about fraud in divorce
cases, just the description of the process and a reference to the
second scenario in the bullet list above.
The author suggests, reasonably, that most readers are
unlikely to be familiar with bankruptcy. The chapter offers some
insights into the bankruptcy process:
a bankruptcy is meant to provide some protection to the
debtor, and some settlement to the creditors (entities that are owed
money)
common bankruptcy frauds hide assets, which provides less
relief to the creditors
bankruptcy can call for liquidation of all assets (chapter
7), or may require the creditors to give the debtor time to reorganize
and make payments (chapter 11 or 13)
on pages 586 through 588, the text provides definitions and
duties for the entities typically involved in a bankruptcy case,
whether there is fraud or not
The text provides excerpts from bankruptcy law and divorce law
on pages 584 through 586. Examples of several schemes, including the
bust-out, follow. Most feel very familiar since they include the same
elements we have seen in numerous frauds.
The chapter ends with some remarks about money laundering,
which typically consists of making large amounts of money appear as
though they came from legitimate sources of income. This is obviously
another form of fraud. The text describes it in three stages:
placement - Money is placed in a bank. The cover is often
that it is cash from a cash based business, like a laundromat or a
vending machine business.
layering - Money is moved to many places (e.g. other banks,
other countries, investments) in various sizes of transactions to make it harder to
follow.
integration - Money is moved back to the accounts of the
perpetrator by appearing to be payment for goods or services.
Assignments
Continue the reading assignments for the course.
Complete the assignments and class discussion made in
this module.