Happy International Fraud Awareness Week - Celebrate With $2 Trillion


Before that headline really scares you, let me clarify - there hasn't been a single fraud scheme that managed to pull off a $2 trillion haul (yet).  However, the fact remains that as rising scams, schemes, the gray market, work under the table and good old tax evasion escalate, as much as $2 trillion in the U.S. economy was "off-the-books" this year.  No wonder the Association of Certified Fraud Examiners (ACFE) needs to hold an International Fraud Awareness Week every year!

Where does that number come from? Edward Feige, an economist with the University of Wisconsin-Madison, who has studied the underground economy for decades, analyzed broad indicators of economic activity for the U.S., including retail sales, and compared with the results being reported to the IRS.  As usual, cash is one of the main culprits supporting all the underground economy, and we're not talking about illegal activity like drug dealers here.  The percentage of Americans who don't have any bank account is on the rise.  That $2 trillion number is also about double the amount in 2009, according to a study by Freidrich Schneider, professor at Johannes Kepler University in Linz, Austria, and the shadow economy represents about 8% of the total U.S. GDP.

A big indicator is the growing discrepancy between official employment rates and relatively stagnant wage inflation, yet rising personal consumption rates and retail sales.  Corporate revenue and profits have also been hitting record levels.  Studies reflect that this level of economic activity is representative of an economy with unemployment in the 5-6% rate, rather than the 7.2% reported by the U.S. Department of Labor last month.  That figure is down from 7.9% earlier in the year.  Downturns have a tendency to drive more people into the underground economy.  The rise of independent service work, think nannies, yoga teachers, information technology and web design have all exacerbated the problem.  Those add to other very traditional contributors to the underground economy - construction, restaurants and truck drivers/delivery.

The IRS acknowledges the issue.  Every five years they produce a study on the tax gap.  The latest, released last year, calculated the net "tax gap" after compliance activities such as audit and collections at $385 billion, up $95 billion from the $290 billion reported in the previous study.  However, as they are seeking to study the results after allowing time for compliance, that study actually reflects the gap for the tax year 2006.  If the rate of increase in the gap continues on pace, that may well indicate the gap by 2011 was over $511 billion, and the problem even worse today.  Economists say those calculations are understatements of the problem.

So, with the IRS being the lowest rated federal agency in polls at only 44% positive views, versus the leader in the Centers for Disease Control (CDC) at 75%, and all others in the poll at least above 50%, why should we care if people report their income?  Well, from a very simple view, so we don't become a country like Greece, with an estimated 27% of GDP off the books, and nearly 90% fraud on valuation of homes for property taxes - austerity measures and dramatically rising unemployment aren't a positive outcome.  Looked at from a different perspective, there are a couple of big impacts.  That same income that is off the books at the federal level for taxes also doesn't pay into Social Security or Medicare, two very popular programs with funding issues long-term.  Nor is there coverage for unemployment, workers' compensation for on the job injuries, or any state taxes paid.

All of those gaps shift costs to the rest of us - our taxes are higher than they should be to cover for everyone who isn't paying their fair share.  Closing the gap could either help eliminate deficits and government debt, lower taxes, or better yet, both.  While these people take risks at not receiving the benefits they didn't pay into (no unemployment, for example), when those risks come home to roost, the burden is shifted to the rest of us.  Failure to qualify for unemployment doesn't prevent those same individuals from receiving Medicaid, food stamps or welfare if they qualify when laid off or hurt.  Lack of medical coverage or workers' compensation doesn't negate the requirement that our local hospitals have if they show up and require critical care.  While their credit may be ruined when unable to pay the bills, the rest of us still pick up the tab.

It's in all of our interests to see fraud reduced - both on the benefits side, with scammers collecting unemployment while working or creating fake medical practices to bilk Medicaid and Medicare, but also on the revenue side - generating necessary income and leveling the playing field for everybody else.  As I've discussed in previous posts, there are approaches that all state, local and federal agencies should be using to address them.  Taking a proactive approach with continuous monitoring.  Utilizing analytics and looking for outliers and anomalies in data to see who doesn't fit.  Building out networks of fraud through linking individuals and businesses utilizing networks, rather than treating each case as one at a time.

Later this week, I will address another of the critical paths to addressing this problem - sharing data, and the tightrope that government agencies walk when considering that issue.


About Author

Carl Hammersburg

Manager, Government and Healthcare Risk and Fraud

Carl Hammersburg manages the SAS Government and Healthcare Risk and Fraud team, and has been with SAS since 2012. Prior to that, he spent 20 years in anti-fraud activities for Washington State’s exclusive workers’ comp insurer, the Department of Labor and Industries. In 2004, Carl formed that agency’s comprehensive fraud program, covering tax and premium audit, claim investigation, provider fraud and collections. Data sharing and investigative partnerships with other State and Federal agencies, as well as driving public availability of information and awareness served as cornerstones to the anti-fraud activities of the program. During his stewardship, audit and investigative activities doubled and outcomes tripled, based on a focus on data mining and predictive analytics that improved efficiency and case selection. Program success under Carl’s leadership resulted in awards from two successive Governors of Washington State.

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