Saint Thomas University

Chapter 6
2. Under what circumstances may an IRS agent use indirect methods?
If the taxpayer has not used an accounting method regularly, or if the process in place does not

reflect income clearly. Indirect methods consider economic reality and lifestyle of the fraudster,

more abstract than direct methods. The IRS's authority to use an indirect method is contained in

Code Sec. 446(b).

References:

Part I Section 446.—General Rule for Methods of Accounting. (n.d.). Retrieved March 20, 2020,

from https://www.irs.gov/pub/irs-drop/rr-08-30.pdf

3. Which of the following is not a major indirect method?

a) Net worth
b) Cash -T
c) Balance sheet evaluation
d) Source and application of funds

The answer to question 3 is “c”

5. Describe the Cash-T method.

Cash T method is an analysis between the amount of cash received and cash spent. When there is

a difference, and the cash spent is more than the received, there is a taxable income unless the

taxpayer proves otherwise. For a taxpayer who files a Schedule C or F, an agent may prepare a

cash transaction account (cash T) to determine the understatement of income. This form is

usually used in a preliminary stage of an audit, the left/debit side list all sources of income and in
the right/credit side all applications of funds. “It is used to determine if a company or individual

had understated income” (Kent, 2016).

References:

Kent, J. (2016, October 26). Forensic Accounting Methods. Retrieved March 20, 2020, from

https://smallbusiness.chron.com/forensic-accounting-methods-66552.html

13. Given the following facts about Sammie Bright, calculate his preliminary understatement

using the Cash-T method.

Schedule C expenses $102,000 (cash out)

Personal living expenses 59,000 (cash out)
Schedule C receipts 112,000 (cash in)

14. In question 13, do you have enough information to determine that Sammie has understated

income? If not, what else is needed?

There is not sufficient information to conclude that Sammie has an understated income. Need

more information about personal living expenses and the existence of a cash hoard

26. You are investigating possible hidden income in a divorce dispute involving an automobile

repair shop with five bays. There are five mechanics, charging approximately $60 per hour for 7
hours per day. Assume 315 days worked with each person’s wage of $30 per hour for 8 hours.

Compute gross profit per year. If the owner reports $42,500 of gross income, what is your

opinion?

Income (5X$60/hrX7) X 315 = $661,500

Salaries (5x$30/hrx8) X 315 = $378,000

Potential Gross Profit=$283,500

Reported Gross Income = $42,500

Possible understatement of Gross Profit= $241,000

This scenario doesn’t consider the any other expenses and/or overhead costs to maintain each

bay and parts for repairs. Apparently, there is an understatement of income, however more

information is required to verify reported Gross Profit.

55. What are some ideas to help prevent procurement fraud through phantom vendors?

Have policies and procedures in place to approve new vendors and verify the existence and the

validity of them whenever you begin a new business relationship. Confirm address, request W-9,

conduct background check. A simple PO Box addresses are often used to create phantom

vendors, so the existence of an address is not verification. Request back-up for invoices and

periodically review vendor files to ensure the back-up documentation is included. Review your

financial statements and spot duplicate payments. Keep informed and up to date on Business

Fraud.
References:

3 Strategies for Preventing Procurement Fraud. (2019, June 26). Retrieved March 20, 2020, from

https://www.withum.com/resources/3-strategies-for-preventing-procurement-fraud/

58. Which would be the best source for a forensic accountant to gather information and learn

about a new industry?

a. RIA Federal Tax Articles

b. Audit Technique Guidelines
c. Daubert Tracker
d. CCH Citator
e. Shepardizing
The answer to question 58 is “b”

Chapter 7

4. Can a gain or loss be recognized when dealing with digital currencies?

Digital currency is a virtual representation of value. The Fair Market Value (FMV) determines

the value of the payment on the date of receipt and must be translated to the national currency

equivalent and then included in income. Some examples of digital currencies are Bitcoin,

Ethereum, Ripple, and Litecoin. “The IRS generally recognizes virtual currency as property, not

legal tender. As such, virtual currency received as payment by an individual or business must be

included as miscellaneous income as an exchange of property or service” (TaxAct, 2020).

Online, privately-owned payment systems regulate these digital currencies. Precious metals or

national currencies may support the value of digital currencies. The gain or loss varies as the

value of the metal or currency fluctuates.

References:

TaxAct. (n.d.). Capital Gains & Losses - Bitcoin and Other Virtual Currency. Retrieved March

20, 2020, from https://www.taxact.com/support/25260/2018/capital-gains-and-losses-bitcoin-

and-other-virtual-currency

12. When must a business file Form 8300?

Federal law requires individuals or businesses receiving more than $10,000 in a single cash

transaction or in two or more related transactions within a 12-month period to file Form 8300

within 15 days of receipt. Transactions must be received in the course of business from a single

payer or agent. Businesses and individuals may also voluntarily file Form 8300 concerning

suspicious transactions of any amount. (IRS.gov)

References:
IRS Form 8300 Reference Guide. (n.d.). Retrieved March 20, 2020, from

https://www.irs.gov/businesses/small-businesses-self-employed/irs-form-8300-reference-guide

13. What is the penalty for the failure to file a Form 8300?
The penalty is $100 per occurrence. For businesses with annual gross receipts of $5 million or

less, the annual aggregate limitation is $500,000. If the deficiency is corrected within 30 days,

the annual aggregate limitation for businesses with annual gross receipts of $5 million or less is

reduced to $75,000. The total annual limit for businesses with annual gross receipts of more than

$5 million is $1.5 million. Deliberately failing to file the form carries a much higher financial

cost. The IRS imposes a penalty of $25,000 or the actual amount of the transaction up to
$100,000 for each occurrence, whichever is greater. There is no annual limit for intentionally

failing to file form 8300. (IRS.gov)

References:

What Does the IRS Do with Form 8300? (n.d.). Retrieved March 20, 2020, from

https://www.optimataxrelief.com/form-8300/

14. Are wire transfers considered to be cash under the Form 8300 reporting guidelines? Are

nonprofit organizations exempted from Form 8300 Reporting requirements?

No, a wire transfer does not constitute cash for Form 8300 reporting purposes. Most nonprofit

organizations are largely exempted from the reporting requirements. (IRS.gov)

19. Log into the FBI website (fbi.gov) and find a case dealing with money laundering. Copy the
case description. Describe the placement, layering, and integration activities that are occurring in
the case.

International Drug Money Laundering Conviction, Alvaro López Tardón

“Tardón faces a maximum sentence of 20 years in prison on the conspiracy to commit money

laundering count and 10 years in prison on each substantive money laundering count, followed

by three years of supervised release. Tardón was the head of an international narcotics trafficking

and money laundering syndicate that distributed over 7,500 kilograms of South American

cocaine in Madrid and laundered over $15,000,000 in narcotics proceeds in Miami by buying

high-end real estate, luxury, exotic automobiles, and other high-end items. The proceeds were

smuggled into Miami by couriers through Miami International Airport, wire transferred to South

Florida by co-conspirators via MoneyGram and Western Union, wire transferred to third parties

internationally on behalf of Tardón, and wire transferred directly to Tardón and his co-
conspirators in Miami through Tardón’s exotic car dealership and other companies controlled by

him located in Madrid, Spain. Following the guilty verdicts, the jury found that a significant

portion of the defendant’s assets should be forfeited. Those assets involved real estate and cars”

In this case, most of the dirty money came from drug-trafficking. In the placement stage, the

criminal introduces illicit profit to the financial system. Tardón placed the money back into the

legal system in several ways. The illegal proceeds from the distribution and sale of the drugs

were sent into the U.S via suitcase by couriers or wire-transferred into multiple bank accounts.

He also bought assets through companies controlled by him. The layering phase is when

complex financial transactions are used to camouflage the illegal source of the cash. In this case,

the unlawful money was spread out through multiple transactions, even with co-conspirators

wiring cash on behalf of him so that each amount did not immediately generate suspicion. The

final stage is integration; it is the process to get the funds back to the criminal from what seems

to be a reputable source. After placing and layering the cash into the financial system, the funds

become integrated. Tardón sold and transferred high-dollar items purchased with laundered

funds; he was living a high life with fancy cars, seaside condos, designer jewelry, and expensive

leather goods. An essential part of the money laundering case against Alvaro Tardón was an

extensive analysis of U.S. financial, real estate, and tax records, as well as additional records

shared by Spanish authorities

References:

Drug Kingpin Dethroned. (2015, February 2). Retrieved March 20, 2020, from

https://www.fbi.gov/news/stories/drug-kingpin-dethroned
International Drug Money Laundering Conviction. (2015, March 12). Retrieved March 20, 2020,

from https://www.justice.gov/usao-sdfl/pr/international-drug-money-laundering-conviction