IRS Criticised Over Its Tax Refund Identity Fraud Detection Rate

by Mike Godfrey, Tax-News.com, Washington

07 August 2012

The United States House of Representatives Oversight Subcommittee Chairman Charles Boustany (R - Louisiana) has sent a letter to the Internal Revenue Service (IRS) demanding a full accounting for the agency’s continued inability to stop tax fraud related to identity theft.

A new audit report from the Treasury Inspector General for Tax Administration (TIGTA) has found that the impact of identity theft on tax administration is significantly greater than the amount the IRS detects and prevents, and that the “IRS uses little of the data from identity theft cases…to detect and prevent future tax refund fraud.”

The IRS reported that it detected almost 938,700 tax returns totalling USD6.5bn in fraud in 2011. On the other hand, using the characteristics of confirmed identity theft, TIGTA identified approximately 1.5m additional undetected tax returns with potentially fraudulent tax refunds totaling in excess of USD5.2bn. TIGTA estimated that the IRS could issue USD21bn in fraudulent tax refunds over the next five years.

J. Russell George, the TIGTA, noted that, while the IRS has expanded its efforts to detect and prevent identity theft, they still “found multiple reasons for the IRS' inability to detect billions of dollars in fraud. As identity theft is the most frequent consumer complaint, and at a time when every dollar counts, these results are extremely troubling. Undetected tax refund fraud results in significant unintended federal outlays and has the potential to erode taxpayer confidence in our nation's system of tax administration."

The reasons TIGTA found that the IRS did not detect billions of dollars' worth of identity-theft-related tax refund fraud included delayed access to third-party income and withholding information. These delays make it difficult for the IRS to detect fraudulent tax refunds at the time tax returns are processed. Third parties are not required to submit income and withholding documents to the IRS until March 31, yet taxpayers can begin filing tax returns in mid-January.

In addition, the IRS has not developed processes to obtain and use the third-party information that is available at the time tax returns are filed, and the use of direct deposits, including debit cards, to claim fraudulent tax refunds increases the risk that the IRS will not detect identity theft.

The IRS continues to allow multiple direct deposits to the same bank account. For example, the report identified numerous examples where criminals used a single physical address from which to file hundreds of tax returns and received significant taxpayer dollars: including 2,137 returns resulting in USD3.3m in refunds to a home in Lansing, Michigan, and 518 returns resulting in USD1.8m in refunds to a home in Tampa, Florida.

Boustany declared that “this report raises serious questions regarding the IRS’s ability to detect tax fraud and whether they are allocating their resources effectively to detect frauds. We’re learning that the IRS paid multiple refunds totalling nearly a million dollars to a single bank account – that is the kind of red flag that ought to draw more scrutiny. We need to know why the IRS is not catching this fraud.”