Tax fraud detection & good reporting can save your job

Don't get these cookies this year. Use fraud analytics. Image by Flickr user m01229
Don't get these cookies this year. Use tax fraud analytics.
Image by Flickr user m01229

Tax fraud doesn’t just steal money from taxpayers, it can strip people of their livelihoods and reputations.

When a manager in a tax agency’s property tax division stole nearly $50M in property tax refunds, the media and external auditors asked:  “How did no one notice this?”  The woman started small, then took larger and larger property tax refunds over a 15 year span.

Her supervisors were terminated because it happened on their watch. They didn’t put the right controls and reporting in place to prevent tax fraud, or even recognize it was happening.  These 20-year agency veterans didn’t know what they didn’t know – and ended up as collateral damage.  The in-house economists did notice the woman’s average property tax refund was trending upward but attributed it to increasing property values during the real estate boom.

The real problem was simply a lack of good reporting.  If they’d had more advanced reporting capabilities and tax fraud detection analytics in place they would have been able to figure out pretty fast that rising property values were not responsible. It wouldn’t have gone on for 15 years.  In fact, it probably wouldn’t have gone on for more than a few months before it was discovered.

The kicker? The tax agency didn’t find it themselves. She was caught when a Bank of America bank teller noticed something suspicious and called the FBI.

In another case, four Oregon Department of Revenue workers were punished after a woman successfully claimed a $2.1 million state tax refund. The employees failed to examine her return, not once but four times. The embarrassing oversights were blamed on an overwhelming workload.

Good reporting from a solid tax fraud analytics solution helps ease the burden on tax agencies, and would have revealed these fraudsters quickly. So, with jobs and reputations on the line, why aren’t more tax agencies adopting these technologies? To answer that, we have to look at how we got here…

Most of the internal systems that tax agencies run on are at least 20 years old. Tax agencies are now replacing them in favor of commercial off-the-shelf products which use business rules engines to do their heavy lifting.  These systems are a bit more out-of-the-box but still require several years, a very large financial investment (e.g. $30-50M), and teams of 30 or more people to implement at a typical state tax agency.  These projects consume tax agencies’ attention, financial resources and their best staff.  They’re trying to implement these new systems while, simultaneously, fighting identity theft and other types of tax fraud.  With battles raging on multiple fronts, tax agency workers often feel overwhelmed and disheartened.

A side-effect of having antiquated tax systems for so many years is that internal reporting is limited or non-existent. Tax agencies have struggled to get real-time reports for management that tell the story about what is going on in the agency.  They might have basic reports of inventories and even some executive dashboards. However, getting their data into more advanced reporting tools - including tools that do advanced analytics, statistics, and forecasting - has been a struggle for them.  Yet, it’s not for lack of wanting.

The alarming tax fraud examples above are the tip of the iceberg. The moral of those stories is that top-notch reporting and fraud detection analytics aren’t “nice to haves”. They are necessities for executives and anyone in a position of managing others, or an organization. In fact, your job might depend upon it.




About Author

Deborah Pianko

Deborah Pianko has 20 years of experience building technology solutions for tax and revenue agencies. She is a subject matter expert in tax administration including collections, audit, return and payment processing, customer service, revenue protection and fraud detection. As a systems engineer, Deborah helped to build the systems used by many tax agencies including DC, Tennessee, Arizona, Maryland, Ohio, Nevada, Puerto Rico, Detroit, Australia and others. Deborah holds a dual Bachelor of Science degree in Economics and Journalism and is a rower and volunteer EMT in her spare time.

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  1. Pingback: Celebrate (?!) Tax Day - State and Local Connection

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