The Dallas IRS auditing staff, concerned with identifying potentially fraudulent

Question

The Dallas IRS auditing staff, concerned with identifying potentially fraudulent tax returns, believes that the probability of finding a fraudulent return given that the return contains deductions for contributions exceeding the IRS standard is 20. Given that the deductions for contributions do not exceed the IRS standard, the probability of a fraudulent terurn decreases to .02. If 8% of all returns exceed the IRS standard for deductions due to contributions, what is the best estimate of the percentage of fraudulent returns.?

Please show work.

Explanation / Answer

Solution:- = 8% x .20 + 92% x .02

= 0.016 + 0.0184
=.0344

so estimated % of fraudulent returns
= 3.44%

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