ID theft as basis of systemic IRS tax refund fraud problems

by Linda Beale

ID theft as basis of systemic IRS tax refund fraud problems

Early in 2012, the IRS and Justice Department announced a major crackdown on identity theft and enforcement efforts against tax refund fraud.  See IIRS, Identity Theft Crackdown Swweps Across the Nation: More than 200 Actions Taken in Past Week in 23 States, IR-2012-13 (Jan 13, 2012).   However, the IRS, which hasn’t been a perennial favorite funding target of GOPers in Congress and has had to operate with too few staff and resources to do its job well, has continued to fail to keep up with the criminals who commit tax fraud.  A recent report by the Inspector General for Tax Administration suggests a range of problems. TIGTA, There are Billions of Dollars in Undetected Tax REfund Fraud Resulting from Identity Theft (July 19, 2012) (Ref. No. 2012-42-080). See also Richard Rubin, IRS may lose $21 billion in identity fraud, study says, (Aug. 2, 2012).

The TIGTA report suggests that identity thieves may end up claiming as much as $21 billion in fraudulent tax refunds over the next five years. Examples include $3.3 million in refunds sent to a single address in MIchigan listed on more than 2000 different tax returns and more than 300 direct deposits totaling almost half a million sent in to a single bank account.  There was one bank account that received 590 deposits totally more than 909 thousand dollars.

The agency responded that it has changed its screening filters to address the issues raised and taken several steps to address tax-related identity fraud, which has been concentrated in Florida. The TIGTA report had a series of recommendations, including better use of third party information and limits on tax refunds being sent to the same bank account. also reports a harsh assessment of the IRS’s effort to provide Tax Identification Numbers (TINs) to non-US residents.  See Richard Rubin, IRS Allowed Fraud in Rust to Issue ID Numbers, Audit Says (Aug. 8, 2012).  (For a similar audit report issued by the Deputy Inspector General for Audit on July 7, 2011, seehere.) The rush to serve resulted in allowing fraud to go undetected, with examples of almost 16,000 TINs going to a single address in Phoenix and $52.5 million in refunds for nonresident TINs going to just four addresses in Atlanta. In 2011, the IRS processed almost 3 million tax returns from nonresidents and sent almost $7 billion in tax refunds in response.  But their rush to provide numbers and process returns meant they made mistakes, apparently with some supervisors actually discouraging employees from taking the time to root out fraud, according to the IRS inspector general.  The IRS has announced that it is reinforcing its procedures to ensure the integrity of the program, including a requirement that original identification documents be submitted with applications for TINs.

See also See Siobhan Hughes, IRS Managers Discouraged Examiners from Rooting Out Fraud, Wall Street Journal (Aug. 8, 2012).

cross posted with ataxingmatter