Harness the power of analytics to manage risk in real-time and ‘nudge’ behavior into compliance

By Teya Dyan, Principal Consultant, SAS Institute

The rampant unchecked pliability of Covid-19 funding programs birthed a new generation of citizen fraudsters and professional criminals. People who had never really dabbled in criminal activities became curious individuals hungry for an easy payout, and those who had already been organized became increasingly bold in their strategies. Greed can be an effective motivator for innovation, and tutorials were readily available to those who wanted to learn how to conduct fraud. There was no longer a need to dive into the swamp of the dark web to learn how to bilk the system and steal funds. Instead, a basic browser search provided abundant education on how to commit ID theft, file fraudulent claims, and stretch the smallest tidbits of truth to gain massive payouts. Between March 2020 and April 2022, an estimated $163 billion in improper payments was paid to those who should not have received those funds. Now, with money no longer easily obtained through fake PPP loans and false unemployment claims, fraudsters are looking for other sources of revenue to satiate their hunger.

Tax fraud has historically been considered low-hanging fruit for the typical citizen fraudster. In the US, the total estimated federal tax gap is $428 billion, with underreporting alone estimated at $398 billion. Perceived opportunity is one of the primary reasons tax fraud is attempted on such a large scale. Without needing to get too involved with advanced schemes like shell companies and overtly obvious criminal activity, fraudsters can commit ID theft and overpayment fraud, avoid payment of tax on large purchases, keep collected sales tax, or even simply gain larger refunds than they’re entitled to. It’s easy to increase deductions here, adjust some numbers there, and tip the scales in their favor… and they play the odds that they won’t get caught. It is common knowledge that agencies around the world have been operating with less staff than they need and that audit rates are currently low. As of 2019, the IRS audit rate for income tax was an average of .25%. Businesses have a slightly higher average audit rate at the local level, but even then, the ratio of account review is significantly low. The less oversight there appears to be, the bolder fraudsters become.

Implementing a holistic approach to risk management and fraud deterrence

Tax agencies must enhance their existing fraud deterrents while increasing risk detection strategies, while still improving their customer service capabilities to meet their educational responsibilities to the public. In addition to ‘Know your Customer’ type of risk mitigation, agencies should consider implementing real-time compliance intervention at the point a tax return is being submitted:

  • During input of information, a return can be compared with historical tax returns for the taxpayer, matched with tax data reported by employers or other businesses or financial institutions (such as wage-earning statements, 1099s, GST/VAT reports, etc.) and contrasted with the information given by the taxpayer.
  • If the information is deemed accurate, the return is accepted and proceeds normally.
  • If the information is deemed potentially inaccurate, the taxpayer is provided with education on tax rules and laws and advised that the information they are providing does not align with the information that the agency has on record.
  • The taxpayer is then prompted to review their submission for revision opportunities or provide additional documentation to substantiate their report.
  • The submission is then run through an additional set of business rules and risk analytics and then either proceeds through automated processes or an alert is created.
  • If an alert is created, the system flags the filing so that automated refunds are not processed, thereby immediately reducing the occurrence of improper payments and refund fraud.
  • The system performs additional analytics to determine potential networks or affiliates, ranks the filing with a risk score, and sends the alert to a review officer.
  • The review officer receives all evidentiary documentation used in the initial real-time analysis, as well as subsequent automated analytics results, so that they can determine whether the discrepancies are within appropriate parameters or if an investigation should be opened.

This sort of cooperative compliance and real-time transactional-based risk analysis is being implemented by revenue agencies around the world. It is proving highly effective at reducing fraud while improving voluntary compliance. Real-time feedback to the tax filer provides behavioral ‘nudging’ in the right direction, which helps taxpayers and improves customer service. It also significantly reduces costs for the agency. By implementing a three-pillared approach of targeted education, avoiding improper payments from automated processing, and providing real-time risk scoring, an agency avoids lengthy customer service call wait times, minimizes collection losses, and ensures that appropriately advanced cases are sent to audit and investigations agents for case review.

Prepare for what is coming

Revenue agencies around the world are tasked with fair and equitable administration, collection, and distribution of tax to keep our communities running and provide services to the public. As investigators and analysts, we are dedicated to this mission, and we understand the need to constantly improve our risk management strategies to keep ahead of current fraud trends. By increasing voluntary compliance and reducing the opportunity for ‘easy’ fraud, agencies also ensure that investigators and auditors have more time and resources to delve into the more complex and sophisticated fraud cases that require their devoted attention to bring to prosecution.

With a recession predicted and subsequent uptick in fraud attempts expected, revenue agencies should prioritize implementation of proven strategies such as using advanced analytics in real-time to enhance customer service and mitigate risk.

Teya Dyan is a Principal Consultant with the Government Fraud and Security Intelligence Division at SAS Institute. Throughout her 16-year career in tax fraud investigation and financial crime prevention with state revenue agencies, she has harnessed the powerhouse combination of advanced analytics, OSINT, and traditional intelligence gathering for case discovery and development. Her current role at SAS combines her professional passions of data analytics, investigations, tax policy, and perpetually curious gumption to foster innovation through technology.

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