552-Week - 6 Fraud Detection & Prevention

7/28/2019 552-Week - 6 Fraud Detection & Prevention

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Week – 6Fraud Indicators

and

Control of Evasion



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Recap

Tax Avoidance and Evasion

Category of Tax Fraud

Fraud Indicators

aff irmative indications; and

aff irmative acts.

Example of Fraud Indicators

Control of Evasion

pri vatization of tax enforcement

tax farming, and

Pre-Shipment I nspection (PSI ) Agencies



At the end of the session students will be able to understand

about –

The major indicators to identify the fraud

Fraud indications and fraud acts ; and

They will also know how to control evasion.



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Fraud is an intentional deception made for personal gain or

to damage another individual.

Tax fraud essentially entails (involve) cheating on a tax

return in an attempt to avoid paying the entire tax obligation.

Examples of tax fraud include –

Claiming false deductions;

Claiming personal expenses as business expenses; and

Not reporting income.



Tax avoidance is the legal utilization of the tax regime toreduce tax liabilities within the law.

By contrast, Tax evasion is the efforts to not pay taxes by

illegal means.

The term tax mitigation is a synonym for tax avoidance use was by tax advisors as an alternative to the pejorative term tax avoidance .

Tax protester are those attempting not to pay tax believe that

they have discovered interpretations of the law that show that theyare not subject to being taxed.

Tax resistance is the declared refusal to pay a tax for

conscientious reasons (because the resister does not want tosupport the government or some of its activities).



Tax fraud is often defined as an intentional wrongdoing on the partof a taxpayer, with the specific purpose of evading a tax known or

believed to be owing.

There are two category of tax fraud -

Legal Source Tax F raud

I l legal Source Tax Fraud

Legal Source Tax F raud : I t involve –

▪ legal industries, legal occupations and legally earned

income, and they have motive or purpose of the violation of tax statutes .

The Legal Source Tax Fraud is a threat to the tax system.

For example –

▪ frivolous filers/non-filers,

▪ Unscrupulous (honorable) return preparers etc.



I l legal Source Tax F raud The Illegal Source Financial Fraud recognizes that –

illegal source income,

which are a part of the untaxed underground economy, and

they threat to the voluntary tax compliance system.

Failure to investigate these frauds would erode public confidence in the tax system.



Avoidance of tax involve shapes and preplans events

to reduce tax within the perimeters (limit) of the law.

Evasion involves some aff irmative act to evade or

defeat a tax, or payment of tax.

Taxpayers who knowingly understate their tax

liability often leave evidence in the form of

identifying earmarks (or indicators ).



Fraud indicators can consist of one or more acts

of intentional wrongdoing on the part of the

taxpayer with the specific purpose of evading tax.

Fraud indicators may be divided into two categories:

1. affirmative indications; and

2. affirmative acts.



1. Affirmative IndicationsAffirmative indications serve as a sign or symptom , or

signify that actions may have been done for the

purpose of deceit, concealment or to make things seem other than what they are.

Examples include –

substantial unexplained increases in net worth substantial excess of personal expenditures over available

resources

bank deposits from unexplained sources

substantially exceeding reported income



2. Affirmative Acts

Affirmative acts are those actions that establish that a

particular process was deliberately done for the

purpose of deceit, subterfuge, camouflage, concealment, someattempt to color or obscure events, or make things seem other than

what they are.

Examples include –

▪ omissions of specific items where similar items are included

▪ concealment (hiding) of bank accounts

▪ failure to deposit receipts to business accounts ; and

▪ cover ing up sources of receipts.



Listed below are the some examples of fraud indicators.The following lists are not all-inclusive and are only indicative of thetypes of actions taxpayers may take to deceive or defraud.

1. Indicators of Fraud - Income Omissions of sources of income.

Failure to report substantial amounts of income.

Bank deposits from unexplained sources

Concealment (hiding) brokerage accounts, and other property.

I nadequate explanation for dealing in large sums of currency

Failure to fi le a return

Cover ing up sources of receipts by false description of source

of disclosed income, and/or nontaxable receipts.



2. Indicators of Fraud - Expenses or Deductions

Substantial overstatement of deductions.

Substantial amounts of personal expendi tures deducted as

business expenses .

Claiming f ictitious deductions .

Dependency exemption claimed for nonexistent, deceased, or

self-supporting persons.

Loans of trust funds disguised as purchases or deductions.



3. Indicators of Fraud - Books and Records Keeping two sets of books or no books .

False entr ies or alterations made on the books and records, backdated or post dated documents, false invoices, falsestatements etc.

Invoices are i r regularly numbered , unnumbered or altered .

Checks made payable to vendors and other business payees arecashed by the taxpayer .

Failure to keep adequate records, concealment of records.

Variances between i tems on the return as compared with books .

Amounts posted to ledger accounts not in agreement with source books or records.

False receipts to donors by exempt organizations.



4. Indicators of Fraud - Allocations of Income Distribution of prof its to fictitious partners.

I nclusion of income or deductions in the return of a related

taxpayer, when difference in tax rates is a factor.



5. Indicators of Fraud —

Conduct of Taxpayer False statement about a material fact involved in the examination.

Attempts to hinder the examination.

For example,

failure to answer pertinent questions,

repeated cancellations of appointments, refusal to provide records,

threatening potential witnesses,

including the examiner or assaulting the examiner.

Failure to foll ow the advice of accountant or attorney.

Failure to make ful l disclosure of relevant facts to the accountant.

Destruction of books and records , especially if just after examination wasstarted.

Payment of improper expenses by or for officials or trustees.

Submission of false Form .

Submitting a false aff idavit .

Attempts to bri be the examiner .



6. Indicators of Fraud - Methods of Concealment

I nsolvency of transferor.

Assets placed in other's names.

Transfer made in anti cipation of a tax assessment or while theinvestigation of a deficiency is pending.

Reservation of any interest in the property transferred.

Transaction not in the usual course of business.

Retention of possession.

False entr ies in books of transferor or transferee.

Use of secret bank accounts for income.

Deposits into bank accounts under nominee names.

Conduct of business transactions in false names.



Control of Evasion



Level of evasion depends on a number of factors one of

them being fiscal equation.

Evasion also depends on the efficiency of the tax

administration. Corruption by the tax officials often render control of evasion

difficult.

Tax administrations resort to various means for

plugging in

scope of evasion and increasing the level of enforcement.

These include –

Privatization of tax enforcement

Tax farming, and

Pre-Shipment I nspection (PSI ) Agencies



Privatization of Tax Enforcement

Professor Christopher Hood f i rst suggested privatization of tax

enforcement for overcoming limitations of government tax

administration in controlling tax evasion.

Some governments have resorted to privatization of tax

enforcement to enhance efficiency of the tax system.

The assumption is that leakage of revenue will lower under aprivatized regime.

In Bangladesh , part of customs administration was privatized in as

early as 1991 .



Tax Farming

Tax farming is an old means of collection of revenue when it is

difficult to determine the leviable amount taxes with certainty.

Governments lease out the collection system to a private entity for a

fixed amount who then collects the revenue and shoulders the risk

of attempts at evasion by the taxpayers.

It has been suggested that tax farming may be a solution to the

problem of tax evasion seen in developing countries.

Governments have historically turned to tax farming for quick

cash.



Tax Farming…

A "tax farmer" buys a "franchise" by making pre-payment to the

government.

The "tax-farmer," then invested with the authority of thegovernment, goes into the "farm" and begins extracting "taxes" from

citizens.

This is a system destined to be abusive as the "tax-farmers" seek

back their investment, plus profit, and are themselves unrestrained by "politics."

Abuses by "tax farmers" (together with an unfair tax system that

exempted the ar istocracy ) were a primary reason for the French

Revolution that toppled Louis XVI.



Pre-Shipment Inspection (PSI) Agencies

Pre-shipment Agencies are employed to prevent evasion of customs duty through under-invoicing and misdeclaration.

However, in the recent times, allegations have been lodged that PSIagencies have actively cooperated with the importers in evadingcustoms duties.

Authority in Bangladesh has found Cotecna, a PSI agency of Swiss

origin, guilty of complicity (involvement) with the importers for evasion of customs duties on a huge scale.

The same company Cotecna was implicated for br ibing Pakistan's prime minister Benazir Bhutto for securing contract for importation by Pakistani importers.



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552-Week - 6 Fraud Detection & Prevention

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