Back in January, as consumers began to file tax returns, some complained that their refunds were delayed. The Internal Revenue Service (IRS) explained the delay was to prevent the growing problem of stolen identity tax returns. But the efforts apparently weren't enough.
While the IRS says it detected 938,664 bogus tax returns, the Treasury Inspector General for Tax Administration (TIGTA) reports finding approximately 1.5 million additional undetected tax returns with potentially fraudulent tax refunds totaling in excess of $5.2 billion. TIGTA estimates the IRS could issue $21 billion in fraudulent tax refunds over the next five years.
"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."
George says the fraud on this scale not only results in significant unintended federal outlays but makes the tax collection agency look bad, undermining taxpayer confidence.
In some cases it wasn't just the IRS that was victimized but taxpayers too. For example, a scammer might have filed a phony tax return claiming a big refund, using someone's stolen social security number. When the taxpayers got around to filing, they discovered the IRS had already sent out a refund in their name to someone else.
Many early tax returns were placed on hold when IRS auditors suspected fraud. But apparently there were so many fraudulent returns this year it overwhelmed detection efforts.
When TIGTA investigated the bogus returns, it said it found a number of reasons so many slipped by the IRS. For starters, the IRS had delayed access to third-party income and withholding information. The investigation said 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.
Not using third-party information
The investigators also said the IRS has not developed processes to obtain and use the third-party information that is available at the time tax returns are filed.
Finally, 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 investigators said. The IRS continues to allow multiple direct deposits to the same bank account.
The Inspector General's office made a number of recommendations to the IRS for reducing the fraud next year and the tax collection agency said it has taken or will take the corrective actions.
Taxpayers can help too. Filing as soon as you obtain your W-2 form will increase the chances of the IRS processing your return before a bogus one submitted by a scammer. Also, carefully guard your W-2 form and other tax documents.