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IRS Identifies More Fraudulent Tax Returns

by Mike Godfrey, Tax-News.com, Washington

06 December 2010


While the United States Internal Revenue Service (IRS) has improved its ability to identify fraudulent tax returns and stop improper refunds, better access to wage and withholding information would help it prevent more tax fraud, according to a report released by the Treasury Inspector General for Tax Administration (TIGTA).

The TIGTA found that the IRS identified almost 249,200 fraudulent tax returns and prevented the issuance of USD1.48bn in fraudulent refunds during the 2010 filing season, a 50% increase over the number of fraudulent tax returns identified during the 2009 filing season.

However, the report also found that the tax returns of those most likely to commit fraud are seldom screened by the IRS. For example, the TIGTA’s analysis found that the majority of tax returns that the IRS identifies as being filed by prisoners are not being screened to assess their fraud potential.

The review found that 254,000 (88%) of the 288,000 returns filed by prisoners as of March 24, 2010 were not selected for screening. Of those, almost 49,000 who claimed refunds totaling more than USD130m had no wage information reported to the IRS by employers.

While some of the potential fraud may have been caught by other IRS programmes, the TIGTA’s report concluded that giving the IRS expanded and expedited access to wage and withholding information during the filing season would significantly increase the IRS’s ability to more efficiently and effectively verify wage and withholding information reported on a tax return at the time a tax return is processed.

“While the IRS is identifying larger numbers of fraudulent returns, improvements must be made to its screening processes to ensure that returns filed by prisoners get adequate scrutiny,” said J. Russell George, the TIGTA. “Unscrupulous individuals, including prisoners, continue to submit tax returns with false income documents to the IRS for the sole purpose of receiving a fraudulent refund. Expanded and expedited access to wage and withholding information would significantly increase the IRS’s ability to verify information reported on a tax return when processed, and prevent fraud.”

The IRS uses data mining to identify potentially fraudulent tax returns using formulas based on specific characteristics of the tax return. The TIGTA assessed the IRS’ processes to identify potentially fraudulent tax returns for screening.

Existing law limits the IRS’s access to wage information. Only individuals claiming the Earned Income Tax Credit have their wage information submitted to the IRS. The TIGTA felt that the IRS could benefit from expediting the use of wage and withholding information it receives from the Social Security Administration.

TAGS: individuals | tax | law | tax credits | Internal Revenue Service (IRS) | enforcement | United States | regulation | individual income tax

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