Billions in ID Theft Tax Fraud Go Undetected

By Christina Camara

The IRS may have issued more than $5 billion in tax refunds in 2011 to fraudsters who assumed the identity of a dead person, child, or someone else who normally wouldn't file a tax return, a new audit says.

Another $21 billion could be refunded to identity thieves over the next five years, according to estimates by the Treasury Inspector General for Tax Administration (TIGTA), which publicly released its audit report on August 2. While the IRS found about 939,000 fraudulent tax returns totaling $6.5 billion, investigators, "using the characteristics of confirmed identity theft," identified another 1.5 million tax returns that went undetected.
 

Indicators That Tax Records Have Been Affected

Alert your clients of possible identity theft if they receive an IRS notice or letter that states that:

  • More than one tax return was filed for them;
  • They have a balance due, refund offset, or have had collection actions taken against them for a year they didn't file a tax return, or 
  • IRS records indicate they received wages from an unknown employer. 
 
Source: IRS
Tampa, Florida, was identified as the city with the most tax-related identity theft, with more than $468 million in potentially fraudulent refunds.
 
"We found multiple reasons for the IRS's inability to detect billions of dollars in fraud," said J. Russell George, the Treasury Inspector General for Tax Administration. "As identity theft is the most frequent consumer complaint, and at a time when every dollar counts, these results are extremely troubling."
 
The report lays out the reasons why tax refund fraud relating to identity theft could go undetected. They include:
  • Delayed access to third-party income and withholding information. Third parties are required to submit income and withholding documents to the IRS by March 31, but taxpayers can file returns as early as mid-January. The IRS therefore can issue refunds before it can confirm the accuracy of information on the returns.
  • The IRS hasn't developed processes to obtain and use the third-party information that's available at the time tax returns are filed.
  • The use of direct deposits, including debit cards, to claim fraudulent tax refunds adds to the risk that the IRS will not detect identity theft. The IRS continues to allow multiple direct deposits to the same bank account. In fact, the audit found that in one case, the IRS deposited 590 refunds amounting to more than $900,000 into one account.

The audit report made seven recommendations for improvement, including new legislation that would increase IRS access and to use the database of the National Directory of New Hires. The database was created to help states enforce child support orders, and the IRS has asked Congress for access to the information.

While the IRS agreed with the recommendations, it didn't agree with the report's $21 billion estimate of fraudulent refunds over the next five years.
 
The IRS said in the report that it's already making improvements, including new identity theft screening filters that will delay refunds until the IRS can verify a taxpayer's identity. The system stopped about $1.3 billion in possibly fraudulent tax refunds through April, the audit said.
 
During a House committee hearing August 2, when IRS Commissioner Doug Shulman was asked about the TIGTA report, he said the study "is very clear that the problems with identity theft mostly are systemic" the Wall Street Journal reported, noting that the report didn't say the IRS mishandled taxpayer ID information.
 
US Representative Charles Boustany Jr., chairman of the Subcommittee on Oversight, says the report "raises serious questions about whether the IRS is deploying its resources effectively."
 
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