US Taxpayers Claim USD1.6bn In Fraudulent Refunds

by Leroy Baker, Tax-News.com, New York

11 November 2008

The number of falsified tax returns, filed in an attempt to obtain fraudulent tax refunds, increased dramatically in the United States between 2006 and 2007, according to a new report from an independent Treasury oversight body.

The report, by the Treasury Inspector General for Tax Administration (TIGTA), estimates the IRS issued approximately USD1.6bn in fraudulent refunds to taxpayers during this 2-year timeframe because of a failed fraud detection system and insufficient resources to work on all the fraudulent returns.

The current findings are the latest in a series of audits issued by TIGTA identifying problems with the Questionable Refund Program (QRP). In March 2007, TIGTA issued a report concluding that the IRS’s Electronic Fraud Detection System was not operational during Processing Year 2006, resulting in an estimated USD318.3m in fraudulent refunds being issued.

A May 2007 TIGTA report concluded that the growth in refund fraud, combined with the IRS’s priority of protecting revenue by freezing refunds, may have contributed to the continued challenges the QRP faces.

TIGTA’s new report concluded that, during the 2006 filing season, the IRS detected and stopped USD188m in fraudulent refunds, but failed to stop an estimated USD894m in fraudulent refunds because its fraud detection system was not operational. While the fraud detection system was available for the 2007 processing season, and the IRS initially stopped USD1.2bn in fraudulent refunds, TIGTA estimates an additional USD742m in fraudulent refunds were issued.

"The IRS has numerous compliance priorities in addition to the Questionable Refund Program, which it must balance against its limited resources. However this is a significant revenue loss to the Federal Government and that must be addressed,” said J. Russell George, Inspector General, Treasury Inspector General for Tax Administration.

“The United States faces an estimated USD345bn tax gap each year. In a time of economic challenge, every effort must be made to prevent the loss of money to the US Treasury," he added.

TIGTA made several recommendations, including that the IRS develop a long-term, strategic approach to balancing available resources to address the growth in refund fraud and other compliance priorities.

The IRS agreed with about half of TIGTA’s recommendations and has developed a 5-year plan, with executive oversight, for the refund fraud program.

Recommended