IFTA/IRP AUDIT WORKSHOP
2010
FUEL TAX EVASION
DISCOVERY TECHNIQUES
DEFINITIONS
• Before we can begin to understand how to
identify fraud or tax evasion, we need to
explore what constitutes fraud or tax
evasion.
• It is critical to understand that instances of
fraud are rare and not easily proven.
• It is equally important to identify the
differences between fraud and negligence.
DEFINITIONS
• NEGLIGENCE. The ‘Lectric Law Library
defines negligence as “The failure to use
reasonable care. The doing of something
which a reasonably prudent person would
not do, or the failure to do something
which a reasonably prudent person would
do under like circumstances. A departure
from what an ordinary reasonable member
of the community would do in the same
community.
NEGLIGENCE
• Some thoughts on negligence:
– Failure to do something (or comply with
prescribed rules) does not constitute
(necessarily) an intent to do so for personal
gain.
– Negligence is generally not purposeful or
deliberate in its intent.
– Negligence indicates an absence of using
reasonable care.
DEFINITIONS
• FRAUD OR INTENT TO EVADE. West’s
Encyclopedia of American Law defines
fraud as “A false representation of a matter
of fact-whether by words or by conduct, by
false or misleading allegations, or by
concealment of what should have been
disclosed-that deceives and is intended to
deceive another so that the individual will
act upon it to her or his legal injury.”
FRAUD
• Fraud has been further defined as “A deception
deliberately practiced in order to secure unfair or
unlawful gain.”
• Proving the existence of fraud requires a high degree of
specific evidence. Generally, fraud must be proven by
illustrating that the subject party’s actions contained five
separate elements per West’s:
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A false statement of a material fact
Knowledge on the part of the subject that the statement is untrue
Intent on the part of the subject to deceive the victim
Justifiable reliance by the victim on the statement
Injury to the victim as a result
FRAUD
• The five elements identified in West’s contain nuances
that may not be easily proven. For example, not all false
statements are fraudulent. A false statement must relate
to a material fact. A false statement that is mistaken is
not fraudulent. To be considered fraudulent, a false
statement must be made with an intent to deceive the
victim. The false statement must be made with the
intent to deprive the victim of some legal right. The
victim’s reliance on the false statement must be
reasonable. Reliance on an absurd false statement will
not generally support the notion of fraud. The false
statement must cause the victim some injury that leaves
the victim in a worse position than she or he was in
before the fraud.
Negligence vs Fraud
• With those definitions in mind, here’s some basic
differences between negligence and fraud:
• Negligence:
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Generally not purposeful
Generally not deliberate
Not designed to deceive for gain
Indicates an absence of reasonable care
• Fraud:
–
–
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Deliberate deception
Intent to deceive for personal gain
Intent to deprive the victim of some legal right
Knowledge that the false statement is untrue
EXAMPLES
• Negligence
– Failure to maintain certain records or data elements (i.e.
odometers or routes of travel)
– Misallocation of jurisdictional distance (i.e. the discovery of
typical error rates)
– Missing data
• Missing retail fuel receipts
• Missing trip records
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Mathematical errors
Poorly maintained records
Gap distance identified
Missing bulk fuel withdrawals
Missing information on fuel receipts (i.e. jurisdiction, fuel type,
etc.)
– Exemptions taken in error
EXAMPLES
• Fraud
– NOTE: Keep in mind that the list below may not necessarily
indicate fraud; the 5 fraud “elements” must exist and be proven
• Erasures, alterations to fuel receipts
• “Manufactured” fuel receipts (see Case History #1)
• Discovery through independent verification that the subject’s tax return and
records are false and untrue (see Case History #2)
• Filing “no activity” returns
• Discrepancies in distance documents (i.e. entries on various documents do
not match)
• Documents that appear legitimate but cannot be based on clear evidence
(see Case History #3)
• Tax returns filed where the supporting documents either maintained or
discovered show an entirely different result. NOTE: This is different than
an incorrectly filed return. This is the discovery of a “manufactured”
return that deliberately results in a lower tax liability (this must meet
the “5 elements of fraud” test).
CASE HISTORY #1
• The taxpayer purchases fuel at retail locations. Several receipts
appear legitimate (they contain all of the information required under
P560). These receipts are generated electronically (i.e. through the
use of “swiping” a credit card). Other fuel receipts have hand written
information (the receipt is pre-printed). The auditor discovers these
“receipts” in every period subject to audit. The jurisdiction in which
the fuel was “purchased” has one of the highest tax rates of the
jurisdictions in which the fleet traveled. The “hand written” receipts
include fuel that would not normally need to be purchased (the
interval between fuelings is suspect). The auditor independently
contacts the jurisdiction in which the fuel was “purchased” to
determine whether the retail location exists. The auditor discovers
that no such location existed during the subject period.
CASE HISTORY #1
•
Do we have fraud? Let’s use the “5 elements” to test the theory:
– Is the false statement a material fact? The discovery of multiple “receipts” in
each period subject to audit would be material.
– Did the subject have knowledge that the statement is untrue? It would appear
so; the receipts were manufactured and not representative of an actual
purchase.
– Was there an intent to deceive the victim? There are multiple victims; the base
jurisdiction, the affected jurisdictions, and most importantly, the jurisdiction in
which the suspect “purchases” were made. By deliberately constructing these
“receipts”, there is a clear intent.
– Was there justifiable reliance by the victim to believe the statement? Yes, as a
general rule a fuel receipt is relied upon to be accurate and valid.
– Was the victim injured by the action? Yes, the jurisdiction in which the
“purchase” occurred granted credit (initially) for purchases that had never
happened. Therefore the tax liability in that jurisdiction was reported and
presented as less than which was actually owed.
•
In this case, it would appear that there are sufficient grounds to indicate that
a fraudulent act had taken place.
CASE HISTORY #2
•
A taxpayer files tax returns with either no activity or very limited activity
outside of the base jurisdiction. The taxpayer admits that he does not
maintain any odometers or traditional trip records. He says that all of his
fuel is bought at retail in the base jurisdiction. His “trip records” consist of
invoices he generates to bill his customers (it has the location of deliveries
and/or pickups). He uses a distance software to determine total and
jurisdictional distance. The auditor performs the audit and comes up with a
no change. Several months later, the bookkeeper for the company calls the
auditor and informs him that the company wasn’t truthful about their
operations. She claims that the company’s vehicles travel in numerous
jurisdictions that are never reported on a tax return. She claims that there
are numerous invoices (at least three per week) that were never presented
to the auditor. She admits that no odometers are maintained and claims
that fuel receipts associated with these “unreported” trips were deliberately
withheld from the auditor. She tells the auditor that the fuel receipts can be
tracked through the company’s credit cards. She gives the auditor the
names of several customers that are for the trips that were never disclosed.
The auditor follows up independently with these customers and they provide
the auditor with their copies of the invoices they received from the taxpayer.
CASE HISTORY #2
•
Do we have fraud? Let’s use the “5 elements” to test the theory:
– Is the false statement a material fact? The discovery of multiple withheld trips
each period subject to audit would be material.
– Did the subject have knowledge that the statement is untrue? It would appear
so; the unreported trips (invoices) were withheld from the auditor.
– Was there an intent to deceive the victim? There are multiple victims; the base
jurisdiction and the affected jurisdictions. Deliberately not presenting these
invoices and failing to report the activity on the tax returns indicates that there is
a clear intent to deceive.
– Was there justifiable reliance by the victim to believe the statement? Yes,
despite the inadequate recordkeeping the jurisdictions believed that the returns
were true and correct; the documents presented verified what had been reported
on the returns.
– Was the victim injured by the action? Yes, the jurisdictions in which the
unreported travel occurred did not receive the fuel use tax associated with that
travel.
•
In this case, it would appear that there are sufficient grounds to indicate that
a fraudulent act had taken place. The independent verification with third
parties serves as substantial evidence that fraud had occurred.
CASE HISTORY #3
•
Taxpayer has a 5,000 gallon bulk fuel tank. The tank is metered with a very
elaborate computer system that tracks all receipts and disbursements. The
system also maintains an inventory. Weekly and monthly reports can be
generated to account for all activity related to the tank. The withdrawal
records detail the vehicle being fueled in addition to the date, gallons and all
information required under P570. The taxpayer receives a metered ticket
from the fuel supplier and a weekly invoice for all purchases made. The
taxpayer reports fuel on the IFTA return based on the withdrawal reports.
The auditor vouches the purchase invoices and metered tickets from the
fuel supplier against the data recorded by the computer fuel inventory
system. The auditor discovers that there are several fuel purchase invoices
that cannot be traced to an actual delivery into the bulk tank (through the
computer system). The auditor finds that of the four weekly deliveries of
fuel, one “delivery” isn’t accounted for in the computer system. The auditor
asks for the cancelled checks for all of the purchases and finds that the
checks for the questionable “purchases” are made out to the name of the
fuel supplier but endorsed by the owner of the fuel company. The bank
account is different than that of the checks made out for the other three
(legitimate) purchases.
CASE HISTORY #3
• Is this fraud? Were the IFTA returns filed
fraudulently by the taxpayer? If so, how?
• The answer to this case is that there was
no apparent wrongdoing by the IFTA
licensee. The IFTA returns (fuel) was
based on the specific withdrawal records
which were clearly accurate and could be
verified. Then, was it fraud at all?
CASE HISTORY #3
• Yes, it was fraud; but of a different kind.
The party that was defrauded was the
IFTA licensee. They paid for fuel
“purchases” that they had never actually
received. The party that perpetuated the
fraud was the fuel supplier. Let’s test the
theory that this is fraud by using the “5
elements”:
CASE HISTORY #3
– Is the false statement a material fact? The discovery of weekly
“deliveries” of fuel that had never occurred is material.
– Did the subject have knowledge that the statement is untrue? It
would appear so; by issuing a delivery ticket and a
corresponding invoice and by accepting payment the subject
clearly had knowledge that the statement was untrue.
– Was there an intent to deceive the victim? Yes, by presenting
the carrier with a metered ticket and an invoice for the
“purchase” there was a deliberate attempt to make the “phony”
delivery look like every other purchase.
– Was there justifiable reliance by the victim to believe the
statement? Yes, since many of the deliveries were in fact
traceable and the documents presented looked exactly the same
as those presented for the legitimate purchases, the victim relied
on the fact that the fourth “purchase” was also legitimate.
– Was the victim injured by the action? Yes, the carrier paid for
fuel that they never received.
POSTSCRIPTS
• Case History #1
– The audit resulted in an increase to the fleet MPG (since the
phony receipts were not actual fuel purchases). The audit
resulted in a substantial reduction of the tax paid credit taken in
the jurisdiction the “purchases” were claimed to have been
made. The penalty for intent to evade was applied and enforced.
• Case History #2
– The audit resulted in the inclusion of distance in each jurisdiction
through which the fleet traveled for the withheld invoices. The
audit revealed fuel purchases that had not been reported. Credit
was given where applicable. The fleet MPG was established at
4.00 because the auditor was uncertain that even with the tip
from the bookkeeper he had seen all of the activity. The penalty
for intent to evade was applied and enforced.
POSTSCRIPTS
• Case History #3
– While there was no impact upon the IFTA audit, the discovery of
fraudulent activity led the auditor to refer the issue to the motor
fuel tax section to follow up on the supplier’s reporting of taxable
sales. There is also a pending investigation on possible state
and federal personal income tax implications (since the aberrant
payments were endorsed by the fuel supplier’s owner and
deposited into what appears to be a personal bank account).
The fuel must have been delivered somewhere; the Department
is following up leads to determine where the fuel may have
actually been delivered. As a final thought, the taxpayer has
estimated that he has overpaid for his fuel by as much as
$800,000 over the past 8 years or so. Approximately $100,000
per year was “minimal” given how much fuel the carrier buys
over the course of a year in both bulk and retail (the carrier
spends over $1 million per year). This case is still pending.