1. Fraud Examination, 3E Chapter 16: Bankruptcy, Divorce and Tax Fraud COPYRIGHT © 2009 South-Western, a part of Cengage Learning

2. Learning Objectives Explain why fraud is so prevalent in bankruptcy, tax, and divorce cases. Describe the nature of bankruptcy and be familiar with bankruptcy codes. Understand civil and criminal bankruptcy fraud statutes. Identify the participants involved in the bankruptcy process. Recognize different bankruptcy and divorce fraud schemes. 2

3. Learning Objectives Understand how perpetrators fraudulently conceal and transfer assets and income in bankruptcies and divorces. Define tax fraud and be familiar with common tax fraud schemes. Understand how money laundering is used to commit fraud. 3

4. Bankruptcy, Tax, and Divorce Fraud Many people hope to maintain assets while minimizing debts. In bankruptcy and divorce frauds, people try to conceal assets or income that could be taken from them. In tax fraud, people are too aggressive in their attempts to minimize tax liabilities. 4

5. The Nature of Bankruptcy Reasons behind Filing for Bankruptcy Gives a debtor relief from creditor collection and foreclosure actions Protects creditors from unfair collection efforts by other creditors Allows the debtor to work out an orderly plan to settle debts or liquidate assets and distribute the proceeds to creditors in a way that is intended to treat creditors fairly. 5

6. Concealing and Transferring Assets Ways assets or income may be concealed Cash may be diverted to another entity Inventory may be shipped to an off-site location Assets or income may be shifted to another entity controlled by the debtor Sales may not be reported properly Payment may be made to fictitious persons 6

7. Concealing and Transferring Assets Indicators of Concealment – Transfers of property or large payments to related parties or individuals, such as insiders, shareholders, or relatives. – Frequent and unusual transfers between bank accounts, particularly between business and personal accounts. – Numerous transactions made in cash that normally are made on account (sales, purchases, etc.) – Unusually large and unexplainable payments to vendors. 7

8. Tax Fraud Common Tax Fraud Schemes Deliberately underreporting or omitting income Overstating tax deductions Keeping two sets of books Making false entries in books and records 8

9. Tax Fraud Common Tax Fraud Schemes Claiming personal expenses as business expenses Claiming false deductions Hiding or transferring assets or income Illegal money laundering schemes 9

10. Money Laundering 10