Spotting red flags

Investigators and CPAs working as a team


By Daniel W. Draz, M.S., CFE

iFraud

There are several issues that insurance investigators need to be aware of when analyzing income tax records. These include the "it's not my business" defense, the importance of complete income tax records, and the value of obtaining financial documentation directly from the custodian of the official government record.

Detecting many of the red flags associated with insurance fraud doesn't require a high level of technical accounting expertise, but it's still important for the investigator to be able to spot financial items that need further examination. A detailed financial analysis is often valuable. It might be helpful to have the assistance of a CPA - preferably an experienced forensic accountant.

As an example, a suspicious disability claim was referred to the Special Investigations Unit (SIU) because it contained several red flags of fraud. The claimant had previously been asked on several occasions if he was working or had any other form of income other than that provided by the disability policy. He denied any form of employment, self-employment, or other earned income from any source.

While initially investigating the claim, the SIU didn't find any new information to suggest that the claimant was working but noted many of the same red flags in the file that concerned the claims analyst. The claims analyst and the SIU felt it imperative to request copies of the insured's tax returns for the past several years to better evaluate the disability and the claimant's lack of work earnings.

When the claimant's tax documents were received, a Schedule C form (Profit or Loss From Business) was included with the return. The SIU analyzed the tax returns and noted that the claimant, who previously informed the claims analyst of various limitations and restrictions including an inability to work or drive, claimed significant mileage expenses on his Schedule C form. The return was turned over to a CPA for more in- depth financial review.

Using the claimant's figures, the SIU and CPA ultimately determined that the claimant had driven more than 30,000 miles in the same year he claimed an inability to drive. Comparing the mileage figures against national averages, the CPA noted that the mileage figures were inconsistent with people using their vehicles solely for personal use and suggested the figures more closely resembled driving associated with employment purposes.

This was a significant discovery. After the CPA review, the SIU further developed information that proved that the claimant was working in a sales occupation while claiming an inability to do so. Not only did the tax returns disprove the claimant's stated limitations and restrictions but they also proved that the claimant was capable of performing work activity. Other documentation obtained by the SIU further supported that the claimant had been working at the time he claimed an inability to do so. Given the significant evidence, this claim was referred for prosecution consideration under mandatory fraud-reporting guidelines. According to the prosecutor, the evidence obtained from the tax returns was critical to the case.

There are several issues that insurance investigators need to be aware of when analyzing income tax records. These include the "it's not my business" defense, the importance of complete income tax records, and the value of obtaining financial documentation directly from the custodian of the official government record.


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