Identity thieves cost taxpayers billions of dollars, according to a Treasury Inspector General for Tax Administration (TIGTA) report released on Aug. 2. The report states that the IRS identified “1.5 million additional undetected tax returns with potentially fraudulent tax refunds totaling in excess of $5.2 billion.”
If the holes are not plugged, the IRS could issue $21 billion in potentially fraudulent tax refunds in the coming five years, according to the report. The agency said it agreed with TIGTA’s report and will follow its advice, and has already tightened its procedures for 2012, the report states.
Peggy Bogadi, commissioner of the Wage & Investment Division of the IRS, wrote in response to the report that the IRS has already taken steps to protect taxpayers, and therefore it believes that the projected five-year $5.2 billion loss to fraud is “significantly overstated.”
Fraudsters file tax returns with stolen names and Social Security numbers. They steal identities by using the information of the deceased, and physically taking identity documents from wallets and mailboxes.
They also use tricks online, such as phishing, which encourages people to fill out personal information in emails or bogus Web forms. The perpetrators set up shop as phony, criminal tax preparers.
The IRS has extensive advice online about how to prevent identity theft. Those who need it most, however, are probably the least likely to be fluent users of the Internet.
Medicare still shows a person’s full Social Security number on its benefit card. Congress has scolded it for the practice.
The IRS does not have a process to cross-check third-party information. For example, it allows unlimited refund deposits to the same bank account, according to the report. Another key information gap is that the IRS issues refunds before it has access to employer wage and withholding information.
“We found multiple reasons for the IRS’s inability to detect billions of dollars in fraud,” J. Russell George, the U.S. Treasury Inspector General for Tax Administration, said in the report. “At a time when every dollar counts, these results are extremely troubling.” George oversees the IRS.
The agency has had little success retrieving stolen funds.
“Once the money is out the door, it is almost impossible to get it back,” George said in an interview with CNBC. “The bad guys know that the IRS is unable, given the limited number of its staff it has, to address every single allegation of tax fraud it has.”
The IRS is using new identity theft filters, starting in the 2012 tax season. By April 19, it had blocked $1.3 billion in fraudulent refunds. One filter is simply flagging the records of people who are deceased, so that identity thieves cannot file returns using their names.
Florida is the epicenter of identity theft and tax scams, according to the Department of Justice. It lists 1,170 indictments and convictions in the past decade, some of which are for massive, high-dollar multivictim crimes. The report states that Tampa and Miami are the worst-hit cities.
In a Dickensian move, Florida said it plans to freeze child support offsets until the IRS finishes investigating fraudulent refund filings. That means children will not be able to get money for their living expenses from their non-custodial parent’s tax refunds.
“We know that holding a tax refund offset can be an inconvenience to customers expecting to receive the offset or expecting to be credited for a child support payment,” states the Florida Department of Revenue on its website.
Parents ordered to pay support can speed the payments by bringing a picture ID and a tax return to a local child support office.
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