Question

Fraud Red Flags: Pretend that you are a IRS revenue agent - what are some red flags that a specific tax transaction of tax return might not pass the “smell” test? What can taxpayers do to help protect themselves if they were chosen for an audit.

Answer 1

There are following Fraud Red Flags as under-

1.      Missing Documents -- It is not uncommon for documents to go missing in the workplace. After all, accidents do happen. However, if this becomes a frequent occurrence, fraudulent acts could be the culprit, especially for checks. Missing checks numbers or gaps in reconciled check numbers can also be an indicator of fraud.

2.      Complaints -- It’s easy to write off complaints as nonsense venting, but complaints are one of the best ways to identify fraud. If employees are complaining about something, don’t take it lightly. Dig further into the situation to identify the cause of the complaint and what else could be behind it.

3.      Excess Purchases -- Fake payees can be used to convert funds. Be aware of excessive purchases as they could be covering a possible payoff of a purchasing agent.

4.      Inventory Shortages -- Internal shrinkage and product loss happens. However, excessive shrinkage could be an indicator of a plethora of fraudulent activities.

5.      Excessive Voids/Returned Checks -- Voided sales slips mean that the sale has been rung up, but the payment was diverted, potentially into the wrong hands. This is similar to cancelled checks. While they are usually legitimate transactions, a cancelled check can be returned to the wrong hands and be re-written to the fraudster. Excessive voids and cancelled or returned checks are common indications of theft and should be watched carefully.

6.      Duplicate Payments -- Duplicate payments in many cases are not fraud-related. However, if a duplicate payment is accidentally made by a company, it is possible for an employee to forge an endorsement of the check. Watch this closely as well.

7.      Invoices Just Under Approval Amounts -- Some employees may be aware of the dollar threshold for management approval and create an invoice just below that approval level. For example, if the approval level is $10,000 and you get an invoice for $9,998, you may want to do a bit more research on that invoice.

8.      Rounded-Amount Invoices -- Fraudsters will often create invoices with rounded amounts. If you don’t see any pennies, it may be a sign that you need to look into that invoice further.

9.      Abnormal Invoice Volume -- Rapid invoice volume increases may be due to a legitimate increase in business, but is also may point to fraudulent behaviour. Monitoring vendor invoice volume and being aware of spikes is a good way to spot abnormal behaviour.