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FRAUD EXAMINATION

ALBRECHT, ALBRECHT, & ALBRECHT

Bankruptcy, Divorce,
and Tax Fraud

Chapter 16
Learning Objectives
1. Explain why fraud is so prevalent in
bankruptcy and divorce cases.
2. Describe the nature of bankruptcy and
gain a familiarity with bankruptcy
codes.
3. Understand civil and criminal
bankruptcy fraud statutes.
4. Identify the participants involved in the
bankruptcy process.
Learning Objectives
5. Recognize different bankruptcy and
divorce fraud schemes.
6. Understand how perpetrators
fraudulently conceal and transfer
assets and income in bankruptcies and
divorces.
7. Define tax fraud.
What Roles Do CPAs & Fraud
Examiners Play in Bankruptcy
Fraud?
Examiner or trustee
Serve on creditors committees &
prepare investigative reports
Assist government with investigative
report
Assist in recovering assets
Act as private investigators
Categorization Match
Fraud Causing Books or Records Being
Bankruptcy or Destroyed or Inaccurate
Divorce
During Stay Assets Are
Bankruptcy or
Transferred to Hide from
Divorce Used to
Negotiations
Do Fraud

Bankruptcy or Too Few Assets to Pay


Divorce Used to Creditors or Spouse Tries
Conceal Fraud to Salvage Reputation
Discuss Bankruptcy.
Liquidate,
Inability to pay debts Individuals &
Legal petition to Companies
courts Reorganize &
Plans developed to develop ability to
repay or liquidate repay debts,
Individuals &
Companies
Chapter 7
Applies to
Chapter 11 Individuals with
Chapter 13 $1M or less in
debts
Define and Discuss Tax
Fraud.
Willingly and intentionally violating the
known legal duty of voluntarily filing
income tax returns and paying the
correct amount of income, employment
or excise taxes.
IRS collected almost $2,000,000,000,000
in revenue and processed more than
222 million tax returns; it costs $0.48
per $100 to be collected or
$9,600,000,000.
Discuss Tax Fraud and the
Criminal Investigation Division.
Mistakes can cost a
20% penalty plus
interest.
Fraud costs 75%
penalty plus interest.
CI agents are trained to
follow the money.
They can conduct
complex financial
investigations.
Discuss Divorce Fraud.
More than 1 million divorces are filed
yearly 50% of all marriages fail.
Amicable breakups are not common,
rather divorce wars ensue.
The legal system is an adversarial
system where attorneys seek to beat
one another.
One spouse often feels cheated by
another and desires to get even.
What Steps are Necessary
to Prove Fraud?
1. That a false representation, usually
one of fact, was made by one of the
parties
2. That the defendants knowledge or
belief that the representation was false
or was made with reckless indifference
to the truth
3. That the defendant showed an intent to
induce the plaintiff to act or refrain
from acting in a certain way
What Causes Most Divorce
Fraud Litigation?
1. The plaintiffs spouse
alleges that the
defendant hid assets
from the divorce court so
they would not have to be
shared or taken away
2. The values of the
assigned assets were
unrealistically low, thus
resulting in an unfair
divorce settlement
Name 2 Most Common Multiple
Bankruptcy Fraud Schemes.
1. Filing for bankruptcy in different
states using your true personal
identifiers

2. Using false names and Social


Security numbers to file in the same
or two or more states listing nearly
identical assets and liabilities
What Actions Are
Criminal in Bankruptcy?
Comment on Other Criminal
Frauds in Bankruptcy.
What Actions Are
Criminal?
Filing for Bankruptcy to
Hide a Fraud
Filing a False Claim
Providing False or
Fraudulent
Representation, Claim or
Promise to a Bankruptcy
Proceeding Either Before
or After Petition is Filed
Review Civil Bankruptcy
Statues.
Section
1144 Revokes Reorganization Plan if
Approval Achieved with Fraud
1328 Similar to Section 1144 But for an
Individual Filed Under Section 13
548 Applies to Transfer UP to 1 YR.
Before Bankruptcy When Transfer
Was Made to Hide Assets and/or
Transfers for Less Than Reasonable
Equipment, Bargain Transfers
Who Participates in the
Bankruptcy Process?

Bankruptcy
Court Adjusters
U.S. Trustee
Debtor
Court Appointed
or Panel Creditors
Trustee Fraud
Examiner
How Does a Fraud Examiner Fit
into a Bankruptcy Proceeding?
List 7 Clues to a Bust Out.
1. Companys address & phone are P.O.
box & answering service
2. New company owned & managed by out-
of-state people or vague about
ownership
3. Sudden management change, NO
Public Notice
4. Cant verify credit references, or
references TOO eager to supply
List 7 Clues to a Bust Out.

5. Size of credit orders & credit balances


dramatically increase

6. Inventory suddenly disappears,


without explanation

7. Customers have a history of buying


goods At unreasonable discounts
List Ways Cash is Concealed
During A Divorce.
Receivable Payments Diverted to
Another Entity, Usually Related

Inventory Shipped to Another Site, Sold


to Related Party At Sharp Discount

Sales Not Reported in Books

Company Pays Personnel Expenses

Undisclosed Business Interests


What Are Some Clues to
Concealment?
Frequent & Unusual Bank Transfers
Cash Transaction Normally Made ON
ACCOUNT
Unexplainable, Unusually Large
Payments to Vendors
Unusual or Rapid Asset Reduction
Travel to Off Shore Tax Havens
Missing, Inaccurate or Damaged Records
Terms Match
Bankruptcy Title 11 of U.S. Code -
federal law governing
bankruptcy
Bankruptcy
Code Legal process to settle
debts in an orderly plan
Bankruptcy
Court A person or entity owed
money by a debtor
Creditor The federal court
overseeing all
bankruptcy proceedings
Terms Match
Debtor A person or entity
declaring bankruptcy

Divorce
A planned bankruptcy

Bustout Legal dissolution of two


married partners
Trustee Individual or firm that
collects debtors assets
& distributes to creditors