Tax fraud and tax evasion cost the government billions of dollars in lost revenue each year. In 2016, Fortune Magazine reported that annual tax evasion averaged $458 billion between 2008-2010. The same article predicted that audit specialists would be able to “recover about $52 billion of that lost revenue, resulting in a net tax gap of $406 billion annually.”[1]
Tax fraud can be the result of individuals and businesses under-reporting their earnings, or when criminals submit false tax reports using stolen personally identifiable information (PII), such as someone’s name and Social Security number. When this occurs, the criminal will use the PII along with fabricated annual earnings. Tax evasion occurs when these individuals and businesses fail to submit their taxes all together.
So, how do auditors identify and prevent fraudulent tax refunds from being paid out?
First, each tax filing is run through an automated system which checks for errors in the submitted tax documents. Any errors are flagged by the system for further investigation by audit professionals. One way of investigating these errors is to compare this year’s return with the information submitted by the individual’s employer. Zacks Finance explains that a tax specialist “compares your claimed income against W-2s, 1099s and other tax documents it has received from businesses under your Social Security number to make sure that your statement of what you earned matches the records of what these entities say they paid you.”[2] Similarly, investigators will also compare the filing against previous tax returns submitted by the individual in question.
In addition to the filings that are flagged, only about 1% of all tax returns are randomly selected for audit by tax professionals. While this does not sound like a lot, this totals over 1 million audits each year. Any discrepancies in the reporting point to potential criminal fraud. Imagine having to go through and manually identify areas of discrepancy on each incorrect or randomly selected return! This is where data technology is essential for enabling tax professionals to identify as many areas of fraud as possible.
Altair Monarch’s interface allows all tax information to be loaded into the system. Monarch detects the information necessary for analysis and provides the tax specialist with the ability to perform all the manipulations needed for identifying areas of discrepancy in side-by-side comparisons of an individual’s tax information.
The most powerful function for auditors is the ability to conduct a ‘negative join’. This join option leaves the auditor with only the pieces of information that do not properly align between two or more tax documents. Using pre-built models, this process can be completed in a matter of minutes. By cutting out manual audit processes, tax professionals can spend more time identifying the criminals responsible for committing fraud and cutting the overall tax gap.
[1] Matthews, C. (2016). Here’s How Much Tax Cheats Cost the U.S. Government a Year. Fortune. http://fortune.com/2016/04/29/tax-evasion-cost/  
[1] Zacks, (2017). How Often Does the IRS Double Check Tax Returns? Zacks. http://finance.zacks.com/irs-double-check-tax-returns-8650.html