The Electronic Submission of Returns and the Detection of Tax Evasion
| Date | 01 February 1996 |
| Pages | 349-352 |
| DOI | https://doi.org/10.1108/eb025733 |
| Published date | 01 February 1996 |
| Author | Simon James,Ian Wallschutzky,Paul Collier |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 3 No. 4 — Tax
TAX
The Electronic Submission of Returns and the
Detection of Tax Evasion
Simon James, Ian Wallschutzky and Paul Collier
A perennial problem in fraud detection is the need
to identify potential fraudsters. One recent area of
interest has been the use of computers to combat
fraud and identify potential fraudsters, for example
Leinicke et al.1 and Daniele2 both described the
application of 'computer fraud auditing' to a
number of situations and highlighted examples
where computers have played an important role in
making detective activities cost effective. Doig and
Graham3 examined measures taken by the Inter-
vention Board using the database operated by EC
Customs agencies to ensure that audit checks were
concentrated in sectors of undertakings where the
risk of fraud was especially high and Dixon4 noted
that computers can assist in the flagging of poten-
tially fraudulent claims through an automated
search for various fraud indicators.
This paper seeks to examine the potential use of
computer fraud auditing techniques in the tax
field. The opportunity arises through the introduc-
tion of the electronic submission of tax returns. An
early Inland Revenue study suggested that an elec-
tronic filing system could be operational for indivi-
dual tax returns under the new self-assessment
proposals to be introduced in the UK.5
Although, of course, the extent of tax evasion is
unknown, it is likely to be massive. The Commit-
tee on Enforcement Powers of the Revenue
Departments6 pointed out that estimates of the
'black economy' in the UK ranged from 2 to 15
per cent of gross domestic product. Between these
two extremes Sir William Pile as Chairman of the
Board of Inland Revenue stated that it was 'not
implausible', that incomes not declared for tax
purposes could amount to 7.5 per cent of GDP.
Such a figure would suggest that something over
£6bn of tax revenue is lost each year through eva-
sion in the UK.
How far the computerisation of the assessment
process can stem such losses is also a matter for
speculation at this stage. However, an insight into
what may be possible comes from the Australian
experience which is several years ahead of the UK
in this area.7 Initially the introduction of the Elec-
tronic Lodgement of Returns (ELS) in Australia
was seen as part of the process of modernising the
system of tax administration. However, not all of
the potential advantages were widely recognised at
that time, including the scope the new system
would have for identifying potentially inaccurate
tax returns.
ELECTRONIC LODGEMENT
The Australian Electronic Lodgement Service
(ELS) was introduced nationally on 1st July, 1990,
and by 1992/93 around 60 per cent of all individual
tax returns were lodged electronically.
For the Australian Tax Office (ATO) the main
benefits were seen by the Commissioner of Taxa-
tion in terms of 'the big savings that are achievable
[which] lie not only in the automated receipt of
data but also in us not having to store and retrieve
paper records'. In the first three years of operation
over A$18m (about £9m) was returned to govern-
ment in ELS savings. Other resources were
released which were redirected into providing a
better service to taxpayers and tax agents.
This is very similar to the experience in the
USA. After the introduction of electronic filing,
the Internal Revenue Service found that the cost of
processing an electronically filed return was only
three cents, whereas the cost of
a
paper return was
72.5 cents. It was also found that the error rate in
electronically filed returns was a mere 3 per cent,
compared to a rate of 17-20 per cent on paper
returns.
Page 349
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