In the current tax year, suppose that 5% of the millions of individual tax returns are fraudulent. That is, they contain errors that were purposely made to cheat the government.
a. Although these errors are often well concealed, let’s suppose that a thorough IRS audit will uncover them. If a random 250 tax returns are audited, what is the probability that the IRS will uncover at least 15 fraudulent returns?
b. Answer the same question as in part a, but this time assume there is only a 90% chance that a given fraudulent return will be spotted as such if it is audited.