Welcome to the Pondera FraudCast, a weekly blog where we post information on fraud trends, lessons learned from client engagements, and observations from our investigators in the field. We hope you’ll check back often to stay current with our efforts to combat fraud, waste, and abuse in large government programs.
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.