ACFE Tax Fraud — Questions and Answers
Question 1: What distinguishes tax evasion from tax avoidance?
- Evasion is the illegal, willful underpayment of tax, while avoidance uses legal means to reduce tax (Correct answer)
- They are the same thing
- Avoidance is illegal and evasion is legal
- Evasion applies only to corporations
Correct answer: Evasion is the illegal, willful underpayment of tax, while avoidance uses legal means to reduce tax
Tax avoidance is lawful planning within the law. Evasion involves deliberate misrepresentation, concealment or omission to reduce tax owed.
Question 2: Which method of proof reconstructs a taxpayer's income by comparing their total spending and asset changes to reported income?
- Net worth method (Correct answer)
- Specific items method
- Bank deposits method only
- Statistical sampling
Correct answer: Net worth method
The net worth method establishes an opening net worth, then shows increases in net worth plus living expenses that exceed reported income, indicating unreported income.
Question 3: An employer withholds income and payroll taxes from employees but does not remit them to the government. This is commonly called:
- Trust fund tax fraud (Correct answer)
- Transfer pricing abuse
- Estate tax avoidance
- Carousel fraud
Correct answer: Trust fund tax fraud
Withheld employee taxes are held in trust for the government, so failing to pay them over is a serious offense, often called payroll or trust fund tax fraud.
Question 4: Which is a common badge of fraud in a tax evasion case?
- Keeping two sets of books (Correct answer)
- Filing returns on time
- Using a professional preparer
- Claiming standard deductions
Correct answer: Keeping two sets of books
Badges of fraud include double sets of books, concealment of assets, false documents, cash dealings and implausible explanations, which together show willfulness.
Question 5: In a U.S. criminal tax evasion case, which element must the government generally prove in addition to a tax deficiency?
- Willfulness, meaning an intentional violation of a known legal duty (Correct answer)
- That the taxpayer was a corporation
- That the amount exceeded one million dollars
- That the taxpayer used an offshore account
Correct answer: Willfulness, meaning an intentional violation of a known legal duty
Criminal tax evasion requires a tax due and owing, an affirmative act of evasion, and willfulness, the voluntary and intentional violation of a known legal duty.
Question 6: A business that records cash sales but intentionally leaves a portion off its books to reduce taxable income is committing:
- Sales skimming for tax evasion (Correct answer)
- Lapping
- Bid rigging
- Round-tripping
Correct answer: Sales skimming for tax evasion
Skimming off-the-books receipts understates gross income, which reduces reported profit and tax liability.
