27 September Zapping Taxes (Illegally of Course) September 27, 2017By Jon Coss - Blog Manager emerging fraud methods Fraud, Tax, Tax Evasion, Unreported Sales, Zapper Software 0 In their never-ending quest to circumvent the law, unscrupulous business owners are now adopting the use of so-called “zapper” software to avoid paying sales taxes. Zapper software automatically deletes a portion of cash sale transactions and then automatically reconciles the business’s back end finances to make it appear that the businesses paid the appropriate amount of taxes. This scheme reduces tax collections for governments and passes the burden to the vast majority of businesses who choose to act within the law.Thanks to a crackdown by federal and local officials, recent arrests include $1 million in unreported sales at Cesar’s Restaurant in Lakeview, IL (home of the “killer margarita”) and $800,0000 at the Lao Sze Chaun restaurant in Milford, CT. However, a simple Google search will reveal that almost no city is immune to the zappers.Zapper software is so popular that some businesses are now starting to offer it to their clients. In December, for example, a Canadian man pled guilty to selling zapper software to eight restaurants in the Seattle area leading to $3.5 million of taxes avoided. It is alleged that his company, which sells Point of Sale (POS) software, also sold the illegal zapper software through a subsidiary in China. After the sale of the software, they even offered to support their customers with their ongoing efforts to defraud the government.Zapper software, while somewhat novel, is just another attempt to apply technology to skirt the law. And while law enforcement training and targeted audits will surely help detect some of these modern-age fraudsters, analytics that use peer comparisons, spike indicators, and other statistically rigorous detection methods can also help detect the problem early. Like the old saying goes, it takes fire to fight fire. Related Posts The Booming Armored Car Industry At a time when people are replacing credit cards and ATMs with their smart phones, it seems that California is recommending increased use of armored cars. The reason? On January 1st, recreational marijuana will be legal in California but still illegal at the federal level requiring marijuana business to pay their sales taxes in cash.The issue is that banks are still unsure of how to handle marijuana businesses’ money without being subject to prosecution for issues like money laundering. The Justice Department has issued “guidelines” to banks on how to avoid prosecution but most banks don’t consider guidelines as legal protection. And not surprisingly, the guidelines are confusing and incomplete. This leads to a cash-based business, which in turn creates the potential for fraud, money laundering, underreporting taxes, and a whole host of other issues.In California, the marijuana industry is expected to grow to as much as $7 billion a year in revenues. In anticipation of this, State Treasurer John Chiang formed a task force to figure out how to collect and transport the funds. Their recommendation, among others, was armored cars. Ugh. But who can blame them? Colorado tried to set up a credit union specifically for the marijuana industry but it was denied by the Federal Reserve in 2015. So, there’s not a lot of great options out there.I, for one, will be closely watching the rollout of legal recreational marijuana. With a healthy tax of around 15%, a University of California Agricultural Issues study claims that 29% of marijuana users may choose to buy the drug illegally. Those sales likely won’t be reported, won’t be taxed, and won’t end up in armored cars. An “Amazing” Contributor to the Nation’s Opioid Crisis The Sacramento Bee, my local newspaper, reported this week on an area doctor, a seemingly successful cardiologist and graduate of Northwestern’s medical school, who plead guilty and was sentenced to 52 months for illegally prescribing opioids.After reading about Doctor Capos’s crimes, 52 months seems grossly inadequate. The sentencing judge agreed, despite acknowledging the doctor’s cooperation, stating that "It's probably giving you a break more than you deserve at this time."The sheer volume of Capos’s crimes are alarming. In one case, he prescribed 2,640 hydrocodone pills to a single patient in 28 days. This would have required the patient to take 98 doses per day. Of course, what likely happened is that the pills were sold on the street to addicts and future addicts—some undoubtedly to our young people.The judge called his actions an “amazing” contribution to the opioid crisis. Yet a quick look at average sentences for drug dealers reveals that convicted methamphetamine dealers average 87 months in prison. Heroin dealers average 63 months. While this “amazing” opioid dealer only received 52 months.It seems to me that the time for talking about the opioid crisis has passed. It’s time for action and one place to start would be tougher sentencing laws on the greedy fraudsters who push these drugs into our neighborhoods. Cigarette Fraud Last week we wrote about charges being brought against a group of alleged fraudsters in California that were trucking thousands of cans and bottles into California to collect the state’s recycling refunds. This week, just so no one feels left out, we’re bringing you a story from the East Coast that deals with cigarette fraud. That’s right… cigarette fraud.As you probably already know, the price of cigarettes varies dramatically from state to state because of the taxes imposed by each state government. For example, in Virginia, where the state has an excise tax of only $0.17 per pack, the average price for a pack of cigarettes is $5.25. New York, on the other hand, adds taxes of $4.35 per pack helping to drive the average price per pack to $12.85. That’s a difference per pack of $7.60.So what does an enterprising fraudster do? Buy cigarettes in Virginia and sell them in New York of course. This is illegal but it apparently didn’t prevent a 26 year old man from driving through Pennsylvania with 7,750 packs of cigarettes purchased in Virginia. That’s over 150,000 individual cigarettes so likely not just for his personal use. That might explain why the Pennsylvania state trooper who pulled him over said the driver was “very nervous, shaking and avoiding eye contact with me at all cost.”The man is now free on bail but facing felony charges. I guess you never know what’s in the truck you pass on the freeway. Last week it was aluminum cans and plastic bottles. This week it’s thousands of cartons of cigarettes. Next week? Student Loan Fraud Anyone who has recently attended college or has a family member in college likely has some familiarity with student loans. In fact, 40 million Americans currently have student loans totaling an astounding $1.2 trillion dollars. Many of those who have applied for loans have been victimized by methods such as “advanced fee scams” that promise the best rate for an upfront service fee, or the ever-present loan elimination scams.With easy access to stolen identities, fraudsters are now targeting the more lucrative loans themselves. Using stolen IDs, they enroll in classes which they, of course, never attend. Loans are made by the government, payments are not, and the unsuspecting “owner” of the loan goes into default when the fraudsters don’t make their payments.In Grand Rapids, Michigan, a man was indicted last month for this exact scheme. He faces up to 20 years in prison for allegedly using stolen IDs to steal $150,000 in loans and grant aid. A quick check of the government’s paymentaccuracy.org website shows that he is not alone. Between the William D. Ford Federal Direct Loan Program and the Federal Pell Grant Program, $6.1 billion was improperly paid in 2016 alone. While many of the improper payments are made to people who simply do not qualify based on income, an increasing number of loans are being made to outright fraudsters. Some estimates place the number of known fraud ring participants as high as 85,000 people. This victimizes the taxpayer, of course, but even more directly the person whose identity is stolen. It can take months or even years to clean up your credit. That’s one lesson I hope I never need to learn. The WannaCry Attack By this time, just about everyone has watched or read a news report about the WannaCry ransomware attack that hit the world’s computer networks on May 12th. Multiple variants of the program will likely attack computers for the foreseeable future, forcing individuals to pay bitcoin ransom or lose their data and causing serious harm to businesses including hospitals and governments.Plenty has been written about the source of the attack and how it works. So, while every “connected” person should read about WannaCry to help protect themselves against future attacks, I don’t see any need to cover this ground here. For me, though, two interesting facets of the story really stand out.First, I find it fascinating and somewhat inspiring that the attack was stopped by a 22-year-old vacationing cyber analyst who goes by the name MalwareTech; with assistance from his colleague Kafeine. These two, and countless others, operate in a world that most of us know almost nothing about to keep our systems safe. It reminds me of the classic Jack Nicholson speech from “A Few Good Men” where he excoriates Tom Cruise for challenging him while he protects our safety. Of course, in this example, there is no evidence of MalwareTech or Kafeine “fragging” any of their tech colleagues.The second interesting point I took form this attack was that most of us could have protected ourselves simply by updating our operating systems and virus protection software. This is a conversation I’ve had innumerable times with my own family. Of course, this also puts software manufacturers in the difficult position of patching years-old operating systems to accommodate those who won’t or can’t upgrade.Bottom line for me: this is just another reminder to remain vigilant and to be thankful for the computer techs who have dedicated their careers to protecting us from those who have chosen to attack us. I hope you can “handle that truth”. Old Fashioned Credit Card Fraud While shopping for groceries this week, my wife turned from her cart when a man stumbled and fell in the aisle. Less than 30 seconds later, she noticed that her wallet was missing from her purse which was sitting in the cart. Total distance from her wallet: 5 feet.Within 3 minutes, she’d called me and alerted the store about what had happened. Within 15 minutes, I’d blocked our ATM card, our credit card, and a specialty retailer card. Total Time: 18 minutes and 30 seconds.What had the robbery netted? A $1,000 gift card purchased at a kiosk at a nearby retailer with our credit card. A second $1,000 gift card purchased at the same kiosk with our ATM card (I was under the mistaken impression that this would require the PIN number). And a $5,000 gift card purchased with the specialty retailer card. Total take: $7,000. In just 18 1/2 minutes.Of course, the thieves also got away with about $150 in cash and my wife’s driver license. She was worried that we were going to be robbed that evening “because they now had our address” but I convinced her that “having our address” made us no more likely to be robbed. We also freeze our credit which offers us some protection from identity theft. So this gave us some comfort.After this incident, I wondered just how much “old fashioned” credit card fraud still exists in the United States. As it turns out, quite a bit, as 23% of the $3 billion in annual credit card fraud is still the result of lost or stolen cards. I was surprised at this number given today’s more sophisticated identity theft and forgery schemes.As often is the case with fraud though, the aftermath can be even more costly than the initial theft. Financially, even though we were not directly responsible for the fraudulent transactions, in the end, we pay through higher fees and rates. And of course, it’s very difficult to assign a cost to the trauma of being robbed at your neighborhood grocery store.The lesson in all of this for me? While it’s important to protect your identity online, don’t forget that thieves still snatch wallets, look for credit card offers in your mailbox and trash, and call your home to try to trick or intimidate you into providing sensitive information. Comment (0) Comments are closed.