Using inconsistencies to detect tax fraud

Commercial lenders face the challenge of detecting tax fraud from businesses that apply for loans. Throughout history, many businesses have used illegal means to conceal the health of their business, and this not only costs the lenders but it also negatively affects the nation’s economy.

The following are ways a lender can detect tax fraud before lending money to a business.

1. Tax Return Verification
Lenders can detect tax compliance inconsistencies of a borrower once they provide their tax return records. They can look for records from the IRS to see if they match what the borrower provided.

If no records of tax compliance appear, or if the records do not match, this should be a cause for concern and the lender should investigate further to avoid fraud.

2. Confirm any tax liability with the IRS
Some businesses will seek money from lenders even when they have tax liabilities with the IRS. If by the time they borrow the IRS has not made public the record, borrowers can use this time to improve their chances of funding. As a lender, search from the IRS database if the business has been paying taxes dutifully before lending money.

If the lender finds inconsistencies in the records, they should investigate further to avoid fraud and to ascertain the truthfulness of the borrower.

3. Correct Tax Lien identification
The challenge, in this case, occurs when a lender has the incorrect business name, or when the borrower has changed their name. If this is the case, the borrower could intentionally try to defraud the lender, or they could be unaware of such inconsistency. The solution for lenders, therefore, is to search the identification from the IRS. Of importance is to use the Federal Tax Identification Number of the business rather than its name.

If the business doesn’t appear on the IRS public record, this should be taken as a serious red flag and should imply the need for further investigation.

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