How did they verify if someone committed fraud or tax evasion in the 1950s for example?
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The short answer is they didn’t. Tax fraud was far easier to get away with prior to computerized records.
What they would do – and still do to a degree – is look for anomalous data. The IRS has really good comparables for people in just about every income bracket, geography, and line of business. If you file a return that is in line with those comparables, odds are you won’t be audited. If you file a return that is out of line with those comparables – say you report expenses that are far higher than similar companies or income that is far lower than other similar businesses in your area – then they would flag you for an audit.
Once the audit happens, they audit would go more or less like it does today, just slower and with far more people. So, for example, they’d head down to your bank and ask for their deposit records for your accounts; since banking was highly localized, odds are you only had accounts close by geographically and those records would be easier to obtain. Similarly, they’d ask you for all of your books for the previous years – which you are required to keep by the IRS – and if you couldn’t produce them they’d see that as evidence of fraud as well.
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