IFTA/IRP AUDIT WORKSHOP 2010 FUEL TAX EVASION DISCOVERY TECHNIQUES
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- IFTA/IRP AUDIT WORKSHOP 2010 FUEL TAX EVASION DISCOVERY TECHNIQUES
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- DEFINITIONS Before we can begin to understand how to identify fraud or tax evasion, we need to explore what constitutes fraud or tax evasion. It is critical to understand that instances of fraud are rare and not easily proven. It is equally important to identify the differences between fraud and negligence.
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- DEFINITIONS NEGLIGENCE. The Lectric Law Library defines negligence as The failure to use reasonable care. The doing of something which a reasonably prudent person would not do, or the failure to do something which a reasonably prudent person would do under like circumstances. A departure from what an ordinary reasonable member of the community would do in the same community.
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- NEGLIGENCE Some thoughts on negligence: Failure to do something (or comply with prescribed rules) does not constitute (necessarily) an intent to do so for personal gain. Negligence is generally not purposeful or deliberate in its intent. Negligence indicates an absence of using reasonable care.
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- DEFINITIONS FRAUD OR INTENT TO EVADE. Wests Encyclopedia of American Law defines fraud as A false representation of a matter of fact-whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed-that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.
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- FRAUD Fraud has been further defined as A deception deliberately practiced in order to secure unfair or unlawful gain. Proving the existence of fraud requires a high degree of specific evidence. Generally, fraud must be proven by illustrating that the subject partys actions contained five separate elements per Wests: A false statement of a material fact Knowledge on the part of the subject that the statement is untrue Intent on the part of the subject to deceive the victim Justifiable reliance by the victim on the statement Injury to the victim as a result
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- FRAUD The five elements identified in Wests contain nuances that may not be easily proven. For example, not all false statements are fraudulent. A false statement must relate to a material fact. A false statement that is mistaken is not fraudulent. To be considered fraudulent, a false statement must be made with an intent to deceive the victim. The false statement must be made with the intent to deprive the victim of some legal right. The victims reliance on the false statement must be reasonable. Reliance on an absurd false statement will not generally support the notion of fraud. The false statement must cause the victim some injury that leaves the victim in a worse position than she or he was in before the fraud.
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- Negligence vs Fraud With those definitions in mind, heres some basic differences between negligence and fraud: Negligence: Generally not purposeful Generally not deliberate Not designed to deceive for gain Indicates an absence of reasonable care Fraud: Deliberate deception Intent to deceive for personal gain Intent to deprive the victim of some legal right Knowledge that the false statement is untrue
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- EXAMPLES Negligence Failure to maintain certain records or data elements (i.e. odometers or routes of travel) Misallocation of jurisdictional distance (i.e. the discovery of typical error rates) Missing data Missing retail fuel receipts Missing trip records Mathematical errors Poorly maintained records Gap distance identified Missing bulk fuel withdrawals Missing information on fuel receipts (i.e. jurisdiction, fuel type, etc.) Exemptions taken in error
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- EXAMPLES Fraud NOTE: Keep in mind that the list below may not necessarily indicate fraud; the 5 fraud elements must exist and be proven Erasures, alterations to fuel receipts Manufactured fuel receipts (see Case History #1) Discovery through independent verification that the subjects tax return and records are false and untrue (see Case History #2) Filing no activity returns Discrepancies in distance documents (i.e. entries on various documents do not match) Documents that appear legitimate but cannot be based on clear evidence (see Case History #3) Tax returns filed where the supporting documents either maintained or discovered show an entirely different result. NOTE: This is different than an incorrectly filed return. This is the discovery of a manufactured return that deliberately results in a lower tax liability (this must meet the 5 elements of fraud test).
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- CASE HISTORY #1 The taxpayer purchases fuel at retail locations. Several receipts appear legitimate (they contain all of the information required under P560). These receipts are generated electronically (i.e. through the use of swiping a credit card). Other fuel receipts have hand written information (the receipt is pre-printed). The auditor discovers these receipts in every period subject to audit. The jurisdiction in which the fuel was purchased has one of the highest tax rates of the jurisdictions in which the fleet traveled. The hand written receipts include fuel that would not normally need to be purchased (the interval between fuelings is suspect). The auditor independently contacts the jurisdiction in which the fuel was purchased to determine whether the retail location exists. The auditor discovers that no such location existed during the subject period.
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- CASE HISTORY #1 Do we have fraud? Lets use the 5 elements to test the theory: Is the false statement a material fact? The discovery of multiple receipts in each period subject to audit would be material. Did the subject have knowledge that the statement is untrue? It would appear so; the receipts were manufactured and not representative of an actual purchase. Was there an intent to deceive the victim? There are multiple victims; the base jurisdiction, the affected jurisdictions, and most importantly, the jurisdiction in which the suspect purchases were made. By deliberately constructing these receipts, there is a clear intent. Was there justifiable reliance by the victim to believe the statement? Yes, as a general rule a fuel receipt is relied upon to be accurate and valid. Was the victim injured by the action? Yes, the jurisdiction in which the purchase occurred granted credit (initially) for purchases that had never happened. Therefore the tax liability in that jurisdiction was reported and presented as less than which was actually owed. In this case, it would appear that there are sufficient grounds to indicate that a fraudulent act had taken place.
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- CASE HISTORY #2 A taxpayer files tax returns with either no activity or very limited activity outside of the base jurisdiction. The taxpayer admits that he does not maintain any odometers or traditional trip records. He says that all of his fuel is bought at retail in the base jurisdiction. His trip records consist of invoices he generates to bill his customers (it has the location of deliveries and/or pickups). He uses a distance software to determine total and jurisdictional distance. The auditor performs the audit and comes up with a no change. Several months later, the bookkeeper for the company calls the auditor and informs him that the company wasnt truthful about their operations. She claims that the companys vehicles travel in numerous jurisdictions that are never reported on a tax return. She claims that there are numerous invoices (at least three per week) that were never presented to the auditor. She admits that no odometers are maintained and claims that fuel receipts associated with these unreported trips were deliberately withheld from the auditor. She tells the auditor that the fuel receipts can be tracked through the companys credit cards. She gives the auditor the names of several customers that are for the trips that were never disclosed. The auditor follows up independently with these customers and they provide the auditor with their copies of the invoices they received from the taxpayer.
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- CASE HISTORY #2 Do we have fraud? Lets use the 5 elements to test the theory: Is the false statement a material fact? The discovery of multiple withheld trips each period subject to audit would be material. Did the subject have knowledge that the statement is untrue? It would appear so; the unreported trips (invoices) were withheld from the auditor. Was there an intent to deceive the victim? There are multiple victims; the base jurisdiction and the affected jurisdictions. Deliberately not presenting these invoices and failing to report the activity on the tax returns indicates that there is a clear intent to deceive. Was there justifiable reliance by the victim to believe the statement? Yes, despite the inadequate recordkeeping the jurisdictions believed that the returns were true and correct; the documents presented verified what had been reported on the returns. Was the victim injured by the action? Yes, the jurisdictions in which the unreported travel occurred did not receive the fuel use tax associated with that travel. In this case, it would appear that there are sufficient grounds to indicate that a fraudulent act had taken place. The independent verification with third parties serves as substantial evidence that fraud had occurred.
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- CASE HISTORY #3 Taxpayer has a 5,000 gallon bulk fuel tank. The tank is metered with a very elaborate computer system that tracks all receipts and disbursements. The sys