Zappers & Phantom-Ware: A Global Demand for Tax Fraud Technology

27 Pages Posted: 2 Jun 2008 Last revised: 3 Dec 2019

See all articles by Richard Thompson Ainsworth

Richard Thompson Ainsworth

NYU - Graduate Tax Program; Boston University - School of Law

Date Written: June 2, 2008

Abstract

There is a demand-market for technology that facilitates tax fraud. By all accounts the providers in this market are working in a growth industry.

In the short term this is bad news for those concerned with tax policy and information privacy. In the long term however, the fight against technology-assisted fraud is stimulating the development of a more robust technology base within tax administrations, and this is good news for those who believe that a sophisticated technological infrastructure is needed to resolve difficult questions of tax design.

This paper focuses on two technology-accelerants of SME tax fraud - zappers and phantom-ware. Zappers and phantom-ware are programs that are added-on (zappers) or factory installed (phantom-ware) to modern ECRs or point-of-sale (POS) systems. Some programs (zappers) have no legitimate purpose other than to facilitate cash skimming at the point-of-sale. Others programs (phantom-ware) may have legitimate (non-fraud) purposes, although these purposes are somewhat obscure (remote from normal business uses). Phantom-ware programs are frequently hidden (in the sense of not being disclosed in user manuals), making their use and even their existence difficult to detect on audit. With training a fraudster can skim cash receipts with phantom-ware as effectively as with a zapper.

The range of technology-regulation being considered by governments in response to these frauds stretches from the development of a centralized data-base to collect and retain all records of all retail sales in a jurisdiction; to mandatory government certification of each and every ECR in use in a jurisdiction; to direct encryption by the government of the raw transactional data passing through an ECR or POS system - without regard for the background system that generates it - a solution that has seen both market-segment and a whole-market permutations; to voluntary third-party encryption and third-party certification of ECRs. There are of course advocates for minimal regulation and traditional audit-enforcement, admittedly with significant enhanced technology training. The audit approach is most effective when there is authority to perform comprehensive audits - a simultaneous examination of all relevant taxes (income, consumption, and welfare levies).

One of the anomalies of this research is that there are very few reported cases of phantom-ware and zappers used in American to skim cash sales. What accounts for this omission?

There are two places to look for the answer: (1) relative tax rates - maybe the American tax rates are significantly different from those in the EU and Canada, and as a result there is no incentive to skim cash sales in America; or (2) enforcement efforts - maybe the American tax enforcement efforts are significantly different, and as a result we do not pick-up on all the technology-assisted fraud that is going on.

This paper suggests the problem is in the American enforcement regime.

Keywords: Zapper, phantom-ware, cash register, skimming, tax fraud, ECR, POS system

JEL Classification: H20, H26, H71, H00, K34, K42, O23, O33

Suggested Citation

Ainsworth, Richard Thompson, Zappers & Phantom-Ware: A Global Demand for Tax Fraud Technology (June 2, 2008). 50 Tax Notes International 1017 (June 23, 2008), Boston Univ. School of Law Working Paper No. 08-20, Available at SSRN: https://ssrn.com/abstract=1139826 or http://dx.doi.org/10.2139/ssrn.1139826

Richard Thompson Ainsworth (Contact Author)

NYU - Graduate Tax Program ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
731
Abstract Views
7,792
Rank
65,077
PlumX Metrics