ARTICLE: IRS learning how to spook

[Mike Ingle <MIKEINGLE@delphi.com>]

InformationWeek, October 4, 1993, p. 38

Interview: Investigator Donald Vogel
Plans to Milk the IRS Go Sour
Computer-aided tax fraud is rising - and so is enforcement

    When executives at Stew Leonard's Dairy, a food retailer in Norwalk,
Conn., pleaded guilty in July to skimming $17 million in sales to avoid
paying $6.7 million in taxes, the case had a singular twist: It was the
largest instance of tax evasion to rely on a computer program. Inside a
hollowed-out book, Internal Revenue Service agents found the fraud
software - dubbed "Equity" - which a programmer had developed, maintained,
and enhanced at the direction of Leonard's managers.

    To find out just how prevalent high-tech tax fraud is becoming - and the
level of IS involvement and culpability - InformationWeek senior writer
Bruce Caldwell talked with Donald Vogel, assistant commissioner for criminal
investigation at the IRS.

What's different about IS-assisted tax fraud?

    These schemes are no differnet from those that use paper. But with
automation, entries can be adjusted quickly, while on paper it can take
hours or days. There's also a degree of comfort in knowing that records on
diskette can't be as easily accessed as journal entries.
    IS folks can be involved in the overall scheme, or can be doing things
at the direction of the business owner that they know are being done only to
perpetrate fraud. [But in other cases] they may not know the true purpose.

What happens to IS employees who assist in tax fraud?

    Every case stands on its own, but if an IS person is setting up these
accounts and working with an owner to tweak accounts, he or she can be
culpable for participating in a conspiracy to defraud the IRS. I would
equate IS people with accountants. In most cases, these people are not drawn
in as defendants; they're typically the ones who testify on behalf of the
government. They can talk about the system, its audit features, who gave the
instructions, etc. We have to prove intent as well as knowledge. Did the IS
person know that what he or she was doing helped perpetrate the crime? What
did this person do to continue the crime? What did he or she gain from this
involvement?
    I would suspect that most people setting up books and records know when
they're being asked to do something out of the ordinary, when something is
not right.

How do you investigate cases that involve information technology?

    We have 87 agents across the country who have been through computer
training. They understand the workings of a PC, and have a lot of
information about programming. They know how to pull out files that
were encrypted, or booby-trapped, or segmented. They know how to safely
download files and maintain a chain of custody for court purposes.
Those 87 agents represent about 3% to 4% of all agents. We also have two
transcription centers where software is run through programs to check for
problems. When we run into an unfamiliar program or operating system, we can
draw upon specialists in the examination division to help.

Was Leonard's a particularly difficult case to crack?

    What was unique in the Leonard's case was that we found software
specifically used to adjust for skim. Usually, there is compartmentalized
information that leads to skims or other audit trails. With Leonard's,
adjusting books for skim was facilitated because [the participants] could
adjust all accounts, including bank deposits, within seconds.

Is computer-aided tax fraud on the rise?

    It's expanding along with automation. We hope our prosecutions deter
such activity. But I'm not so naive to think that people won't try it.

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Hmmm...87 agents specially trained for computer tax fraud, and they know
how to "pull out" encrypted files. Now, what if those files were encrypted
with, say, IDEA, or even DES? That would be a little harder to "pull out".
And what if "Equity" (great name for a tax-cheating program!) was on an
encrypted hard-drive partition instead of in a hollowed-out book? That might
create a real headache for the IRS. This could lead to some interesting
cases in the near future, especially if the person with the encryption keys
was also the defendant in the case.