Inconsistencies as an Indicator of Tax Fraud Published March 24, 2019
In our previous post, “The Art and Science of Sniffing out Fraud”, we discussed the distinction between those business loan applicants that are committing large-scale, criminal fraud and those that are committing “fraud-light” to push through the underwriting process. This isn’t to say that “fraud-light” occurrences are to be taken lightly, rather these are the more everyday attempts to conceal the true financial health of a business.
In fact, it’s possible that these “fraud-light” indicators could lead to a larger effort of concealment that could present a real risk to commercial lenders so looking for any and all inconsistencies when making a credit decision is a best practice. In our experience monitoring and reporting on IRS tax compliance, we see these acts manifest through a few key tax-related indicators that should cause a red flag for lenders during the underwriting process.
IRS Related Inconsistencies That Lenders Should Watch Out For
1.TAX RETURN VERIFICATION
ISSUE: The tax return provided by the borrower does not match what the IRS has on record for their business.
INSTANCE: This typically manifests itself in two different ways. 1) The business provides the lender a copy of a tax return that has never been filed with the IRS. All it takes to provide an unverified tax return is to simply complete the tax returns with numbers that show the business’ income in a positive manner, but never submit them to the IRS. 2) The business files the tax return with the IRS, but then proceeds to manipulate the numbers on the tax form to provide to the lender after they have filed.
SOLUTION: Verify the tax return data directly from the source in addition to obtaining the tax returns from the business. This way not only will you ensure that you get verified data to support the income analysis, you will know whether your prospect has attempted to mislead you with manipulated records which equals a red flag.
2. TAX LIABILITY IDENTIFICATION
ISSUE: In the underwriting process the business indicates to the lender that they have no outstanding IRS tax liabilities.
INSTANCE: This typically arises when the IRS has yet to file a tax lien against the business for its outstanding tax liabilities, so there is no public record of a tax lien on file when the lender does a public record search on the business. The presumable intent is that the business wants to conceal the tax issue to position themselves in better light for funding.
SOLUTION: When underwriting a business, search for IRS liabilities not filed IRS tax liens, when trying to determine if the business is paying their taxes or not. Should you identify tax liabilities for the business when your prospect indicates otherwise should be a red flag about not only the health of the business, but the truthfulness of your prospect.
3. TAX LIEN INCONSISTENCY
ISSUE: Through a public records search on the business no IRS tax lien is identified, but when searched directly at the IRS there is a lien present.
INSTANCE: IRS tax liens are filed at the Secretary of State or County Recorder’s offices. Public records searches take the name provided by the borrower and attempt to find a match at the specific state or county as indicated by the lender. Therefore, IRS tax liens can be missed if lenders are searching public records with an incorrect name or if the borrower changes their name. This could be done with intent to defraud the lender or it could be an honest oversight. Regardless, this is problematic and potentially dangerous for lenders.
SOLUTION: Search for IRS tax liens directly at the source, the IRS, utilizing the unique Federal Identification Number, not name, of the business. Whether it was intentional or not, the identification of an IRS tax lien when one didn’t show up in a public record search should be a red flag to investigate further.
At Tax Guard, we provide these listed solutions for lenders to catch tax-related inconsistencies that could indicate some level of fraud attempt by the prospective borrower.
In our next post, we share the perspective of a Tax Guard customer and provide insight into the checks and balances their organization employs to protect against fraud. Click here.