View
219
Download
0
Category
Preview:
Citation preview
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 1/25
1
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 2/25
Week – 6Fraud Indicators
and
Control of Evasion
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 3/25
3
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
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 4/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 5/25
5
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 6/25
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).
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 7/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 8/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 9/25
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 ).
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 10/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 11/25
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
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 12/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 13/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 14/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 15/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 16/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 17/25
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 .
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 18/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 19/25
Control of Evasion
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 20/25
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
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 21/25
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 .
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 22/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 23/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 24/25
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.
7/28/2019 552-Week - 6 Fraud Detection & Prevention
http://slidepdf.com/reader/full/552-week-6-fraud-detection-prevention 25/25
25
Recommended