How did they verify if someone committed fraud or tax evasion in the 1950s for example?
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Answer: The population was smaller, the IRS employed tens of thousands of clerks, accountants etc. and filing a tax return wasnt mandatory.
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.
The boring answer is that they kind of didn’t really find as much in the past as they do now. Instead, they made sensible decisions on what kind of things to look for, *”this year we are looking extra at all deductions for X and Y”*.
Say, deductible travel expenses AND declarations on property sales, just to name something.
If you didn’t do travel deductions and didn’t sell a property that year, you wouldn’t get audited unless something at a quick glance looked really weird with the numbers.
They’ve never **audited** millions 😉. They don’t even do that today. In FY22 they only audited 700,000 returns.
Auditing is a very involved, time consuming process. Most returns are superficially processed and accounted for. And the IRS started partnering with IBM in the 1950s to help with that.
I had a family member go through an audit in the 90s. What the guy did was show up at his office, sit at a desk and request and go through financial records to make things tie out. Could you give fake documents (which would be a major crime)? Sure, but the way accounting works is that all inflows and outflows are recorded on a general ledger which rolls into trial balances which then become financial statements. So as they look through your financial statements and tax returns, etc., it should all tie back to a general ledger, which should then be further supported by evidence like invoices, credit card processing statements, bank statements, things like that. So let’s say I recorded a bunch of erroneous expenses to try and reduce my taxable income. An auditor should be able to try that back through the general ledger to see what those expenses were, and then match those to the bank statements and accounts payable systems to see what the actual invoices for those were. If stuff doesn’t match or make sense, then that’s where you dig in. And as someone else said, they learn to have a general sense of how things should be and dig in on things that don’t look right. In one example I’ve heard, a construction company was recording like $75k per year (this was in the 90s) on “Training and Education.” Now, you’d expect some cost there for workers getting certifications, but 75k for a company of that size was insane. So the IRS looks into what was in there. Turns out it was the owner expensing his kids’ college tuition to reduce taxable income. That’s a no-no, and I think he got fined for that.
Another thing the agent would do is start conversations with employees. He would always start like general chit-chat kind of stuff, and by asking questions would gradually steer the conversation towards mining them for information which would assist in the audit.
As someone else said, you submit returns every year but they don’t audit all returns every year. Even today with computers, a full audit is an intensive process.
Punch cards, at first. This started within a few years after WWII. The census was already being conducted using data encoded onto little cards that could quickly be run through machines and tabulated. Simple tax returns were easily encoded and processed in a similar manner, and information could be verified electronically.
Mainframe computers took over the job and enabled the IRS to perform more sophisticated analysis of tax returns for errors or potential fraud. Currently, the problem is that the old computers and software are so complicated that they can’t easily be replaced by modern systems.
The fact is the irs didn’t audit millions of tax returns a year. An audit is an in depth look that they do only if they find discrepancies with your filing. They do not audit every filing, they do a quick check against it vs what was reported per pay period. An audit they go back and check every detail in every filing and report for 7 years, a single audit can take a couple of months. There is no way they could audit every single filing.
This is also the reason most people who get audited are lower socioeconomic standing. Really wealthy people have accountants and lawyers that specialize in tax code enforcement, which makes it expensive and difficult to do so they can get away with a lot as long as they are not blatantly committing tax fraud. But if you make 40k to 250k and mess up badly? They are coming after you in a heartbeat, because they know you will just roll over and take it.
Mr. Simpson, this government computer can process over 9 tax returns per day. Did you really think you could fool it?
You send people to collect and verify records. Physically in person as well as phone calls, faxes and such.
You don’t verify *all* of the filings. You just look into the large or suspicious ones.
Okay, imagine when you draw a picture with your crayons. You need to color inside the lines and make it look nice. Well, when grown-ups had to check many paper tax papers, they did something like that too, but with numbers and words.
They had special workers called “tax examiners.” These examiners wore their special glasses and looked carefully at each paper to make sure the numbers were correct and the rules were followed, just like your drawing has to follow the rules of coloring.
They also had special books and guides that helped them know what numbers should be there. If something didn’t seem right, they would send a letter to the person who sent the tax paper. It’s a bit like when your teacher corrects your drawing and asks you to fix something.
It was a slow and careful job, just like how you carefully draw your pictures. Grown-ups did their best to catch mistakes or problems, just like when you ask your grown-ups for help if you’re not sure about something.
So, before computers, the grown-ups used their eyes and special tools to make sure everything was okay with the tax papers, a bit like how you use your crayons to make a nice picture!
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