Question

How might an account with fraud examination skills be utilized by the IRS in tax audits?

Answer 1

What is the 'Internal Revenue Service - IRS'

The Internal Revenue Service (IRS) is a U.S. government agency responsible for the collection of taxes and enforcement of tax laws. Established in 1862 by President Abraham Lincoln, the agency operates under the authority of the United States Department of the Treasury, and its primary purpose includes the collection of individual income taxes and employment taxes. The IRS also handles corporate, gift, excise and estate taxes. People colloquially refer to the IRS as the "tax man."

BREAKING DOWN 'Internal Revenue Service - IRS'

Headquartered in Washington, D.C., the IRS services the taxation of all Americans. For fiscal year 2016, it processed more than 244 million income tax returns, including both individual and corporate tax returns. During that period the IRS collected more than $3.3 trillion in revenue and issued $426 billion in tax refunds.

E-Filing

Individuals and corporations have the option to file income returns electronically, thanks to computer technology, software programs and secure internet connections. During the 2016 tax-filing season, 92% of all returns came through this e-file option, which comes to more than 131 million out of more than 152 million returns. The number of returns that use e-file has grown steadily since the IRS began that program. By comparison, 40 million out of nearly 131 million returns, or nearly 31%, used the e-file option in 2001. As of April 2017, more than 81.6 million taxpayers received their returns through direct deposit rather than a traditional paper check, and the average direct deposited amount was $2,932.

Audits

As part of the enforcement mission of the IRS, the agency audits a select portion of income tax returns every year. For the 2015 tax year, the agency audited approximately 1.2 million income tax returns, or 0.6% of all returns filed. This number breaks down to 0.7% of individual income tax returns and 1.1% of corporate tax returns (excluding S corporations). Around 71% of IRS audits occurred through the mail, while 29% happened in the field.

After rising to a peak in 2010, the number of audits has steadily declined. The amount of funding set aside for tax enforcement has declined 20% from 2010 to 2016 which indicates even fewer audits should occur. Reasons for an IRS audit vary, but some factors may increase the odds of an examination. In 2016, someone who made more than $200,000 in one tax year has a 1.7% chance of facing an audit. A taxpayer with over $1 million income per year faced a 5.8% chance of being audited.

Other red flags for an audit include failing to declare the right amount of income, claiming a higher-than-normal amount of deductions, running a small business as self-employed, making large charitable donations compared to income and claiming rental losses. There is no single factor that determines who does or does not face an IRS audit each year.

Becoming a fraud examiner—a.k.a. a financial detective—is not for everyone. Detectives—either in law enforcement or in the private sector—typically have distinct personality traits (see “ America’s Original Private Eye ”): They’re as good with people as they are with numbers and they are inclined to be aggressive rather than shy and retiring. This helps them achieve success in adversarial situations where confrontation is endemic to their work. For people with these qualities and the proper qualifications, career opportunities are plentiful. Three successful CPAs who possess both talk about their careers as fraud examiners.

Tom Golden, who heads PricewaterhouseCooper’s Midwest investigations practice in Chicago, assesses the field: “Companies know fraud is epidemic—the phone is ringing off the hook. We have doubled the number of examiners in the past year, and we’re still growing. There is no end in sight.” Robert J. Lindquist, senior managing director for Citigate Global Intelligence & Security in Washington, D.C., agrees and adds, “For those professionals who wish to excel, this field has much opportunity.” And according to Debbie Cutler, a partner with Kramer, Love and Cutler in New York City: “Clearly, the CPA’s role in combating fraud has increased due to recent corporate scandals and media attention. There is growth in this area as companies implement internal control systems and look for ways to reduce fraud.”

As the career paths of these CPAs affirm, becoming an antifraud expert doesn’t take months—it takes years. Formal education in the fraud examination field is new and limited—but growing (see “ Antifraud Education and Training ”). Until four years ago, only 19 colleges out of 900 offered a class in fraud examination. That number now exceeds 150, with 200 more schools planning to add a course shortly. But for the time being, it is necessary for most budding fraud examiners to learn this craft on the job.

Forensic accounting and fraud examination are different but related. Forensic accounting work is done by accountants in anticipation of litigation and can include fraud, valuation, bankruptcy and a host of other professional services. Fraud examinations can be conducted by either accountants or nonaccountants and refer only to antifraud matters.

Lindquist says interested CPAs should learn about the legal aspects of fraud. “It is important to understand exactly what constitutes fraud,” he says, “which includes practical knowledge of the legal system and concepts such as the elements of the offense, what constitutes proof, mens rea (intent) and completeness of evidence.”

Both Lindquist and Cutler say antifraud education and training will include interviewing skills. According to Cutler: “Conducting proper interviews is a large part of being an effective fraud examiner. It is hard to overemphasize the importance of this skill.”

Golden says that CPAs interested in doing fraud work must commit to the time demands of the training, get the proper education, pursue the certified fraud examiner (CFE) designation and make their interest in the field known to their employer. “Becoming a fraud examiner is not something that should be pursued part-time,” Golden says. “There are a lot of ‘wanna-bes’ who think the work sounds interesting, but they haven’t acquired the background to differentiate themselves. In my office at PwC, we won’t hire CPAs for this field unless they also are CFEs or are working to acquire the designation.”

Certification, however, is only one facet of becoming a fraud expert. Many employers believe the most attractive job candidates are CPAs with many interrelated skills. The pros recommend CPAs have at least two years of solid auditing experience, obtain the CFE designation and then work for a law enforcement agency (see “ Government Employment Opportunities ”). Working on complex fraud cases in law enforcement for several years offers an invaluable learning experience that could place someone ahead of other applicants when he or she returns to the private sector in this increasingly competitive field. Here are the personal and private- and public-sector experiences that led these three CPAs to professional fulfillment.

MS. PERRY MASON
Perhaps Debbie Cutler was born to be a fraud examiner. “When I was young, my family referred to me as Perry Mason,” she said. “I was a very inquisitive child who wouldn’t give up until I got the answers.” It was happenstance that led her to combine her natural talents with her accounting degree.

“I’d spent 10 years in public accounting performing traditional audit work,” Cutler said. “One day a partner invited me to help investigate an accounting malpractice case that included fraud allegations against a U.S. senator. I jumped at the chance, and as it turned out, I loved the work.”

That was 15 years ago. As Golden did, Cutler started making it known within her firm that she was interested in fraud assignments. She took fraud-related continuing professional education and eventually obtained her CFE designation. Debbie now spends nearly half of her time working on fraud cases. “For me, investigating fraud is a very challenging and rewarding occupation. I like the fact that you are dealing with people in difficult situations, and no two cases are exactly the same.”