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© CGI Group Inc. CONFIDENTIAL
Zappers: What’s New in Electronic Sales
Suppression
FTA Technology Conference
August 2014
Executive Summary
2
Background:
• Tax cheats have been skimming cash from the receipts of businesses in
various fashions f...
Agenda
3
• Historical View of Skimming
• Quick Review of Zappers
• Zappers in the US?
• Recent News and Legislation
• Dete...
Historical Skimming Techniques
4
• Open drawer – not entering all the transactions into the
cash register or point of sale...
What is a Zapper?
5
• Computer function that facilitates tax evasion
• Typically creates two sets of books
• Owner avoids ...
Sales Suppression as a Service (SSaS)
6
• New service being offered to businesses
• Installer provides the service to its
...
Are zappers being used in the US?
7
YES!! Traditional methods of skimming are
certainly being used but below are some exam...
Estimated Annual Revenue Loss
8
State
Number
of Restaurants
Estimated
Restaurant Loss
Estimated
Conv. Store Loss
Californi...
Recent News in this Area
California
• Audit Unit that is dedicated to the issue
• Studying the restaurant industry
• Study...
Recent News in this Area
Oklahoma
• Releases audit results of convenience stores
• “Most owe at least $300,000 to $400,000...
Recent News in this Area
Canada Revenue Agency
• Three year pilot/review
• 424 businesses (restaurants in all provinces an...
States with Current Legislation
12
Many states have laws that makes it illegal to possess a zapper:
• Arkansas
• Californi...
Options to Detect Sales Suppression Devices
• Set up fake stores and invite POS/ECR sales people
(NY approach)
• Client li...
Additional Option to Detect Sales Suppression Devices
1099-K
• Current use of 1099-K data in audit selection
• Manipulate ...
The Revenu Québec Solution
15
Québec determined that the solution needed to:
• Solve the problem of zappers and traditiona...
The Sales Recording Module (SRM)
The SRM is the device underlying the technological solution. The SRM
must be connected to...
Mandatory Billing in the Restaurant Sector
17
4 Measures4
Public
Communication
Campaign
3
Inspection
Activities
1
Obligati...
Flow of Data
18
Sales Recording
Module
POS System
Cash Register
Receipt Printer
Québec Results
19
• 2011-12, the Québec government recovered $160
million in additional sales tax in the first year alone
...
Revenu Québec Results
20
• The cost to audit a restaurant has decreased from
$4,400 to $190 (a 96% reduction)
• An audit t...
Pilot Approach
• Utilize SRM under existing Audit authority
• Install SRM during initial taxpayer visit and record the dat...
Full Implementation Approach
• An alternative approach would go straight to a full roll-
out of the solution for one or mo...
Summary
• Traditional skimming has been around for years but
technology has allowed skimming to become fast, easy,
and ext...
24
Contact Information
25
Bryce Berg
Senior Consultant
Tax and Collections
(515) 306-7483
bryce.berg@cgi.com
www.cgi.com/govc...
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Zappers: what’s new in electronic sales suppression? Slide 1 Zappers: what’s new in electronic sales suppression? Slide 2 Zappers: what’s new in electronic sales suppression? Slide 3 Zappers: what’s new in electronic sales suppression? Slide 4 Zappers: what’s new in electronic sales suppression? Slide 5 Zappers: what’s new in electronic sales suppression? Slide 6 Zappers: what’s new in electronic sales suppression? Slide 7 Zappers: what’s new in electronic sales suppression? Slide 8 Zappers: what’s new in electronic sales suppression? Slide 9 Zappers: what’s new in electronic sales suppression? Slide 10 Zappers: what’s new in electronic sales suppression? Slide 11 Zappers: what’s new in electronic sales suppression? Slide 12 Zappers: what’s new in electronic sales suppression? Slide 13 Zappers: what’s new in electronic sales suppression? Slide 14 Zappers: what’s new in electronic sales suppression? Slide 15 Zappers: what’s new in electronic sales suppression? Slide 16 Zappers: what’s new in electronic sales suppression? Slide 17 Zappers: what’s new in electronic sales suppression? Slide 18 Zappers: what’s new in electronic sales suppression? Slide 19 Zappers: what’s new in electronic sales suppression? Slide 20 Zappers: what’s new in electronic sales suppression? Slide 21 Zappers: what’s new in electronic sales suppression? Slide 22 Zappers: what’s new in electronic sales suppression? Slide 23 Zappers: what’s new in electronic sales suppression? Slide 24 Zappers: what’s new in electronic sales suppression? Slide 25
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Tax cheats have been skimming cash from the receipts of businesses in various fashions for years. Technology has allowed this skimming to become fast, easy, and extremely hard to detect which is costing states hundreds of millions of dollars annually. Bryce Berg, Government Tax and Collections expert at CGI, discusses how the use of technology to place an electronic lockbox at the business location can dramatically reduce non-compliance and increase revenues. www.cgi.com/govcollect

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Zappers: what’s new in electronic sales suppression?

  1. 1. © CGI Group Inc. CONFIDENTIAL Zappers: What’s New in Electronic Sales Suppression FTA Technology Conference August 2014
  2. 2. Executive Summary 2 Background: • Tax cheats have been skimming cash from the receipts of businesses in various fashions for years Problem: • Technology has allowed this skimming to become fast, easy, and extremely hard to detect which is costing states hundreds of millions of dollars annually Historical Solution: • Government tax agencies adding additional audit resources to combat the problem Technology Solution Available: • Use of technology to place an electronic lockbox at the business location that has proven to dramatically reduce non-compliance and increase revenues"
  3. 3. Agenda 3 • Historical View of Skimming • Quick Review of Zappers • Zappers in the US? • Recent News and Legislation • Detecting Sales Suppression Devices • Revenu Québec’s Solution and Results • Implementation Approach • Questions
  4. 4. Historical Skimming Techniques 4 • Open drawer – not entering all the transactions into the cash register or point of sale system • Two sets of books: One for personal records and another in case of audit • Accurate books but filing false returns • Reprinting the same invoice • Training mode • Cancel the transaction after cash is received • Discount or coupon
  5. 5. What is a Zapper? 5 • Computer function that facilitates tax evasion • Typically creates two sets of books • Owner avoids sales/income tax on the deleted receipts, while keeping the sales taxes collected from consumers • Cash based businesses are the highest users of the software (restaurants, bars, convenience stores, etc.) • Receipts are renumbered • Flash drives, removable CDs, or accessed through the internet
  6. 6. Sales Suppression as a Service (SSaS) 6 • New service being offered to businesses • Installer provides the service to its customers • Erase, purge, delete, crash or physically destroy the hard drive on a regular basis • ECR/POS installer maintains access to system • Manipulation service is provided remotely • Installer maintains an accurate set of books in a remote location, which is often located in another state • Becoming the new norm in the zapper community
  7. 7. Are zappers being used in the US? 7 YES!! Traditional methods of skimming are certainly being used but below are some examples of zappers that have been detected in the US: • New York • NY Dept. of Taxation personnel posing as new restaurant owners • 90% of ECR/POS salespeople tried selling zapper software with ECR/POS system • California • Undercover footage of zappers being used • Connecticut – $17 million by a grocery store • IRS Income Tax Audit • Michigan – $20 million by a restaurant chain • Sister-in-law informed CIA • Ohio – $3 million by a restaurant chain • FBI, Joint Terrorism Task Force, Homeland Security • Over 275 cases in Québec
  8. 8. Estimated Annual Revenue Loss 8 State Number of Restaurants Estimated Restaurant Loss Estimated Conv. Store Loss California 62,469 $287.2M $83.8M Georgia 16,081 $39.4M $18.4M Illinois 25,193 $96.5M $28.7M Indiana 11,309 $48.5M $22.0M Louisiana 8,129 $34.8M $9.0M Michigan 15,729 $57.9M $29.4M Minnesota 9,767 $41.2M $17.9M New York 42,610 $231.8M $72.3M Pennsylvania 24,628 $90.6M $27.0M Utah 4,320 $15.7M $8.3M Total US (including other States) 503,500 $2,315.0M $1,133.7M Finland 9,731 $143.2M N/A
  9. 9. Recent News in this Area California • Audit Unit that is dedicated to the issue • Studying the restaurant industry • Studying the ECR/POS systems in depth • Found both internal (phantom-ware) and external (zappers) devices • Undercover footage of sales suppression taking place Sales Suppression Symposium (April 2014) • Representatives from 23 states and Canada attended Quebec • Expanding the SRM solution into the bar industry • Revenu Quebec Moves to Record Drink Sales in Bars 9
  10. 10. Recent News in this Area Oklahoma • Releases audit results of convenience stores • “Most owe at least $300,000 to $400,000” • Mom and Pop C-Stores sue Oklahoma Tax Commission Illinois • Fraud investigation on gas station owners • 27% of owners had skimmed over the past four years with some being over $1M per year • Sales Tax Zapped by Tax Zappers Washington • Passed legislation that included language that a business would be required to use an electronic monitoring device for five years if they wanted their business permit reinstated 10
  11. 11. Recent News in this Area Canada Revenue Agency • Three year pilot/review • 424 businesses (restaurants in all provinces and grocery stores in Québec) • 143 cases of fraud • Average of $1 million for each case • CRA Finds Rampant Restaurant Fraud Vancouver, British Columbia • June 2012: InfoSpec Systems Inc. convicted of selling zapper software by the BC Supreme Court after a CRA investigation • July 2013: British Columbia Court of Appeals acquitted the company due to the sale of zapper software not being illegal • January 2014: Law went into effect that made it illegal 11
  12. 12. States with Current Legislation 12 Many states have laws that makes it illegal to possess a zapper: • Arkansas • California • Connecticut • Georgia • Illinois • Indiana • Kentucky • Louisiana • Maine • Michigan • North Carolina • Oklahoma • Tennessee • Utah • Vermont • Washington • West Virginia Three additional states considered legislation this past year: • Missouri • New York • Texas
  13. 13. Options to Detect Sales Suppression Devices • Set up fake stores and invite POS/ECR sales people (NY approach) • Client list from salespeople that offer zapper software • Targeted list but still need to perform audits on identified clients • Make a number of purchases prior to conducting an audit • Time consuming and number of audits is limited based upon available resources • Identify leads from other agency audits (Labor) • Employees being paid cash or unusual ratio of cash to credit • Use a Sales Recording Module (Québec approach) • Automated and allows for resources to be designated to other audit functions • Pilot approach or full implementation • Reduces time and cost of audits allowing for stronger audit coverage 13
  14. 14. Additional Option to Detect Sales Suppression Devices 1099-K • Current use of 1099-K data in audit selection • Manipulate the sales data based upon known issues (tips, sales tax, etc…) • Apply cash/credit industry averages to data • Compare amount to reported amount • Targeted list of audit candidates • While this may help identify noncompliance issues, it will not resolve the skimming or zapper issues • Sales amount includes non-taxable goods, tax, tip, and shipping costs (cannot get exact) • Depending upon how the business is registered, it does not separate sales amounts by location • In-state vs out-of-state sales • Does not track cash • The timing of receiving the information • Still have to take the time to perform the audit 14
  15. 15. The Revenu Québec Solution 15 Québec determined that the solution needed to: • Solve the problem of zappers and traditional skimming • Be independent of Point-of-Sale (POS) system developers and Electronic Cash Register (ECR) manufacturers, as they believe that some were involved in the design and distribution of zapper software • New York findings support this • Make restaurant owners aware of risk of being caught • Securely send transactional information to the Tax Authority • Promote voluntary compliance • Not be intrusive for the business owner
  16. 16. The Sales Recording Module (SRM) The SRM is the device underlying the technological solution. The SRM must be connected to a cash register or point-of-sale system and a receipt printer. It is designed to: • Serve as an “electronic lockbox” • Receive data related to commercial transactions • Record transaction information (such as sales and tax amounts) in secure data storage • Send the information required to print the bill to a receipt printer • Be tamper resistant and allow for easy detection if tampering was attempted • Combat both zappers and more traditional skimming efforts 16 SRM
  17. 17. Mandatory Billing in the Restaurant Sector 17 4 Measures4 Public Communication Campaign 3 Inspection Activities 1 Obligation to provide the Bill 2 Obligation to generate the Bill with the SRM
  18. 18. Flow of Data 18 Sales Recording Module POS System Cash Register Receipt Printer
  19. 19. Québec Results 19 • 2011-12, the Québec government recovered $160 million in additional sales tax in the first year alone • Does not include income tax or additional audit assessments • By 2018-19, Québec estimates that they will have recovered $2.4 billion in additional consumption and income taxes
  20. 20. Revenu Québec Results 20 • The cost to audit a restaurant has decreased from $4,400 to $190 (a 96% reduction) • An audit that used to take 70 hours now takes only 3 hours • Benefits both the Revenue Department and the customer • The number of annual audits has increased from 120 to 8,000 and most of the work can be done electronically with minimal disruption to the business
  21. 21. Pilot Approach • Utilize SRM under existing Audit authority • Install SRM during initial taxpayer visit and record the data for approximately six months • Most states believe that they have this right under their authority to conduct audits • Audit selection criteria based on existing DOR tools • Benefits of the Pilot approach • Low cost and risk • No new legislation needed (likely) • Benefits would far exceed costs (ROI of 3:1 during first year of Pilot) • Proves the magnitude of the problem and provide a concrete estimate • Could be used in multiple industries to provide the legislature with very strong data to determine next steps 21
  22. 22. Full Implementation Approach • An alternative approach would go straight to a full roll- out of the solution for one or more industries • Each business would be required to use an SRM for each of their cash registers • The state could then purchase inexpensive electronic cash registers for businesses with no electronic cash registers • New legislation would likely be needed 22
  23. 23. Summary • Traditional skimming has been around for years but technology has allowed skimming to become fast, easy, and extremely hard to detect • Skimming and the use of zapper software has become the norm in cash based businesses • Tax agencies are trying to combat technology with traditional audit techniques • Successful IT solutions are available that combat both traditional skimming and sales suppression devices 23
  24. 24. 24
  25. 25. Contact Information 25 Bryce Berg Senior Consultant Tax and Collections (515) 306-7483 bryce.berg@cgi.com www.cgi.com/govcollect ISO 9001 Certified About the Presenter: • Over 15 years of tax experience (13 in a tax agency) • Former Compliance Division Administrator • Former IRS Disclosure Officer • Process improvement • Team and agency-wide quality programs
  • JanineVorster

    Jan. 7, 2016
  • synapticgap

    Jul. 13, 2015

Tax cheats have been skimming cash from the receipts of businesses in various fashions for years. Technology has allowed this skimming to become fast, easy, and extremely hard to detect which is costing states hundreds of millions of dollars annually. Bryce Berg, Government Tax and Collections expert at CGI, discusses how the use of technology to place an electronic lockbox at the business location can dramatically reduce non-compliance and increase revenues. www.cgi.com/govcollect

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