Whose Tax Payment Is It Anyway?
Keeping up with fraudulent techniques is a daily activity at the New Hampshire Department of Revenue (“NHDRA”). NHDRA has, with the help of our embedded IT team and thought-provoking articles published via The Fraud of the Day, risen to the occasion of the ever-changing landscape of fraud. The fact pattern discussed below highlights the dual need for due diligence to be done by companies when “approving” tax estimate payments to state departments of revenue, as well as the need for stop gap measures for departments of revenue to prevent paying out large sums to fraudsters when they claim “payments have been made in error.” The big challenge we all find is how to match the check with the person/account; to date that continues to be a manual review process for many.
In 2010, NHDRA experienced a case of the fraudster being his own tipster, which brought to light the need for intelligent systems to prevent individuals from “banking” business organizations’ money for their own future misuse. In this example, the tax manager of a company (a temporary employee) created fraudulent tax invoices which caused company employees with check writing authority to issue checks to various departments of revenue, including NHDRA. Using his social engineering skills, the fraudster also gained access to another employee’s PIN to get into the company’s computer system in order to effectuate the check writing himself. Using these two methods, the fraudster was able to make five tax estimate payments to NHDRA, totaling $213,870. The fraudster mailed the company checks and directed the payments to be placed under his personal Social Security number (SSN) against any interest and dividends tax liability. As the payments were made, the fraudster falsely informed NHDRA that the payments had been made in error and requested an immediate refund. When he did not receive his refund as expeditiously as he liked, the fraudster began contacting NHDRA directly. At the time, it was only by having in place basic business rules that require review of certain refund requests and exceptionally astute employees answering the phones that NHDRA was able to immediately prevent a refund check totaling $75,000 from being sent to the fraudster. Further, right after the calls came from the fraudster, the company, itself, contacted NHDRA seeking further information about the checks being written to NHDRA, as they had recently fired the defendant and discovered the tax invoice payments.
Thanks to the responsiveness of the New Hampshire Attorney General’s Office, in collaboration with the U.S. Postal Inspection Services, U.S. Dept. of Education, Office of Inspector General, and U.S. Attorney’s Office, they determined that the fraudster diverted $953,434.27. The fraudster’s scheme, spanning four years and two separate employers, led him to create “invoices” to effectuate corporate payments to which he then added his own SSN to the invoices/checks. He then mailed the checks to pay off his student loans (over $100,000), obtain a refund from further “overpayment” of student loans and make bogus tax payments to the Vermont Department of Taxation, Massachusetts Department of Revenue and NHDRA totaling more than $800,000. Just days before the government secured a warrant for the fraudster’s arrest, the fraudster fled to Ireland, where he had applied for citizenship and was in the process of signing a long-term lease for property on which he had placed a substantial deposit. His return flight purchase triggered the fraudster’s arrest at Boston’s Logan Airport immediately upon landing, and our fraudster was sentenced to three years in prison in October 2011. Here was the ultimate example of agencies working together toward a common goal. I truly believe it is through joint initiatives such as this where we find our greatest strength.
What this case brought to light for NHDRA was the critical need to migrate from manual intervention in order to analyze certain requests for refund even further. What grew from this case was the development/implementation of even greater efficiencies that we have gained from our home grown Business Intelligence (BI) system, which allows us to see a single view of the taxpayer, profile taxpayer activity and query any instance of potential fraudulent activity we detect. We have married the manual efforts of our intelligent work force with technology to collect, maintain and organize that knowledge to become an aegis that prevents fraud against the State of New Hampshire. The systems we have painstakingly developed allow us to work smarter, think differently, and react quicker.