A taxing perspective on fraud

By Carl Pacini, Ph.D., J.D., CPA;George R. Young, Ph.D., CPA

carl-pacini-80x80  george-young-80x70    Fraud EDge: A forum for fraud-fighting faculty in higher ed

About that headline above: we're just kidding, of course, about the "taxing perspective" part. In fact, we've written this column to help those of you who aren't "tax types" to see how an educator can easily provide a different, yet important, perspective on fraud to students.

Incorporating tax fraud ("tax evasion" for you attorneys) into a fraud examination class provides many benefits to students. First, it gives them a different perspective about the pressure leg of the fraud triangle by shedding light on a possible motive to commit fraud, such as keeping assets due to federal, state and local governments. It's important to tell students that even if tax fraud wasn't the primary motivation for fraud in a case, a perpetrator's desire (and pressure) to not be prosecuted for tax fraud is one more reason for him or her to evade law enforcement. 

Secondly, students will learn how perpetrators commit tax fraud and the applicable laws. This will be important knowledge when they become CFEs and might have to spot the telltale signs of tax fraud and understand its relationship to money laundering. (Tax fraud is money laundering's first cousin.) 

Thirdly, students will become more aware of further employment opportunities, which include working for the Internal Revenue Service (IRS) and, on the other side of the table, assisting lawyers who defend those charged with tax fraud. 


How can educators incorporate tax fraud components into their classrooms? One approach is to engage in either the daylong or three-hour version of IRS' hands-on, role-playing tax fraud examination adventure, "The Adrian Project." Contact your local IRS office to see if it offers this fun educational endeavor. 

You can incorporate tax fraud into your fraud examination class by requiring each student to choose a case that has been adjudicated in court or has been reported in the media that does not contain a discussion of the tax implications of the fraud. The student will submit a one-page paper that summarizes the facts of the case and, in a separate section, state the law (by title and section number) that the fraudsters most likely violated with reasons why they violated the law. Each student's paper should also include a listing of all elements of the law or laws the fraudsters violated. 

Before you give this assignment, do two things: 1) provide students the major ways tax fraud is committed, and 2) briefly lecture on the major statutory sections of which the student should be aware. 

Here are the few ways most tax fraud is committed: 1) underreporting income (including not reporting income at all) 2) overstating deductions and/or credits and 3) providing false information other than amounts on returns. The first two ways are probably obvious. Two examples of the third way of committing tax fraud include the situations in which tax evaders either lie about having signatory authority over a foreign bank account, such as not checking the correct boxes at the bottom of Schedule B (Interest and Ordinary Dividends), or mischaracterize income, such as calling the sale of illicit drugs on Schedule C (Profit or Loss from Business) sales of nutritional supplements. 


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