Florida Tax Professionals Beware – Are Your Clients Keeping Two Sets Of Books with New Technology?
Ok, so skimming a little off the top for business in industries that deal with a lot of cash is nothing new. It hasbeen going on since income taxes began – and probably before that. But there is something new going on now that will catch a lot of tax professionals off guard. There are well known commercial retail management software companies out there that are offering AUTOMATED SALES SUPPRESSION DEVICES known as a "ZAPPER" or "PHANTOM SOFTWARE." These are high tech devices that tell the owner just how much cash (s)he can take out of the register at the end of the day but appear to have a clean sales record. The software even helps to keep a completely separate set of books for the business - one for the business's real profit analysis and one for the taxing authorities. The result is less sales tax being remitted to the states as well as less income taxes to both the states and IRS. Not only is this fraud, but from a sales tax perspective – this is intentionally stealing state funds that can land the business owner and just about anyone with knowledge that it is happening in jail. Nothing to joke around about for a tax professional. I might also mention that franchises and landlords that get paid on a percentage of sales should take strong note to how this software can be used to reduce franchise fees and rent payments too.
I'm posting this blog to make tax professionals aware of the issue. I heard about it in a meeting between the FICPA and the Florida Department of Revenue on November 18, 2011. Apparently, these types of cash scamming technology have been around for a while and has been prevalent in Europe and Canada. Now there have been several reports of the software showing up in the United States. Of course, Florida is no blushing bride when it comes to fraudulent activity. I was very intrigued to hear that Florida along with several other states put together a joint task force to investigate how prevalent the Phantom Tax Software was. The task force set up a fake new restaurant in New York and inquired with 17 different vendors of retail management systems. Of the 17 different companies they approached – 13 of them offered the task force agents some form of the Phantom/Zapper technology. That's right – 13 out of 17 of the vendors were actually offering the technology without the task for asking for it. So you have to ask yourself, "how many of my clients are using this kind of software?" This is not a question to ignore.
As a tax professional, you should be aware that several states, including Florida, are in the process of passing legislation to provide more teeth to investigate and prosecute these scoundrels. It is my understanding that the legislation under way right now in Florida will make it a felony to "sell, purchase, install, transfer, or [even] possess" Zapper or Phantom technology. Yes, this is a very serious issue and, yes, the state of Florida (DOR) should be given extra weapons to fight the fraudulent activity. However, the one part of the legislation that really worries me is the one little word "posses." If you know anything about technology, then you know that when a software company offers several versions and modules to its software, most of the time, those other modules or potential upgrades are partially if not completely included with the original version of the software. To get access to the additional module or upgrade, you are given an access code and might download an update. So – if your completely honest client has retail management software that happens to also offer Zapper/Phantom technology, then your client could be guilty of a felony without actually having any knowledge that the software is in place. If you are a bookkeeper for the types of industries being targeted by these companies, then you too could be guilty of a felony (if this legislation is passed).
I do not have any name of the software companies that are producing the Zapper/Phantom software. If anyone reading this article does know any of the names, then please leave a comment and I'll spread the word. FYI – I mentioned my concern about the inclusion of the word "posses" in the legislation to one of the DOR attorneys at the Liaison meeting and he (I'll leave names out) said that he was concerned as well.
UPDATE: Richard T Ainsworth, the author of the articles below, has offered his email address if anyone would like to contact him directly on this subject. He would be particularly interested to hear from anyone that knows another instance where the software was discovered in the Unitied States. You may email Mr. Ainsowrth at email@example.com
UPDATE 2: Rumors have surfaced that the software can now redirect credit card transactions to another banking institution, effectively erasing credit card transactions as well. The states / IRS better figure out a way to detect and battle this criminal activity before the availability of this type of software becomes even more widely known.
Statutory Reference: Section 213.295, Florida Statutes
Current Situation: Automated sales suppression devices or "zappers" are software programs that falsify the records of electronic cash registers and other point-of-sale systems. This technology allows dealers to fraudulently create a virtual second set of records in order to evade state and federal taxes. In the case of sales tax this results in the theft of taxes collected from citizens.
Proposed Change: This proposal would make it illegal to sell, purchase, install, transfer or possess sales suppression software or devices.
New York Senant Legislation Bill S2611 - Automated Sales Suppression Act
MAINE - Article on Zapper Legislation Being Considered - 11-18-2011
Articles on the Subject:
Massachusetts Zappers - Collecting The Sales Tax That Has Already Been Paid, by Richard T Ainsworth, Boston University School of Law - Working Paper No. 09-28 (May 28, 2009)
FINDING ZAPPERS: Technology-Assisted Sales Suppression: PowerPower Presenation by Richard T. Ainsworth, Massachusetts DOR, October 19, 2009
Below is a link to an adverisement produced by the Swedish IRS. The video is rather funny and includes an English translation. Swedish Government Anti-Zapper Commerical