Bankruptcy Fraud

Bankruptcy fraud occurs when an individual or business files for bankruptcy in an attempt to conceal their true assets and income in order to reduce associated tax liabilities.

Filing for bankruptcy can also result in unpaid back taxes from previous years being forgiven which gives unscrupulous taxpayers another reason to use this method to avoid paying due taxes.  Certain tax obligations are considered non-dischargeable debt in bankruptcy while others may be discharged.

Bankruptcy fraud is considered a major problem in the US and is a major area of focus for the Criminal Investigations (CI) unit of the IRS.

Recent Cases of Bankruptcy Fraud

An Indiana man and owner of two businesses, was recently convicted for schemes that involved tax, bankruptcy, and social security fraud.  He evaded federal income taxes from 2008 to 2010 by using his two business accounts to pay for personal expenses, which he then reported as business expenses. He then submitted false records to his tax preparers, knowing that they would underreport his income and thereby minimize his tax assessment.

This allowed him to continue receiving social security disability payments, which he was no longer eligible for. He purported to be unable to work and without income even though he was receiving substantial income from the businesses he owned.

In an effort to conceal his assets and income, he also claimed that he had only lent his name to these businesses. When the IRS finally caught up to him, he tried to file for bankruptcy in another attempt to evade paying the taxes on his two businesses.

Despite the defenses put forth by his criminal tax attorney, he was convicted of tax evasion, social security fraud, and bankruptcy fraud and sentenced to 24 months in a federal prison followed by an additional two years of supervised release.  He was also ordered to pay a $62,000 fine.

A Missouri optometrist recently made headlines for tax fraud and fraudulent bankruptcy filing.  This optometrist claimed a $40 million tax refund, along with attempting to evade tax obligations of over $161,000 by concealing his income and hiding his assets. As part of his effort to conceal, he had his three-story house titled under his mother’s name.  He also had three vehicles titled under a fictitious company which created for the purposes of defrauding the government.

He didn’t stop there.  He also listed eight dependents on any returns he did file, while in reality his only dependent was his spouse. He claimed an exemption from withholding W-4 on a form for his former employer, basically asserting that he was exempt from having income tax deducted out of his paycheck.  Finally, he filed a fraudulent bankruptcy petition that initially resulted in his large back tax liability being discharged.

The IRS eventually caught, arrested and charged the optometrist.  He pled guilty to one count of tax evasion, two counts of bankruptcy fraud, one count of submitting false claims to the US government, and one count of obstructing administration of internal revenue laws. He was sentenced to 39 months in federal prison and ordered to pay $334,000 in restitution to the IRS.

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