By now, I'm sure, you have heard something about the billions of tax dollars the IRS is sending to fraudulent filers who use stolen identities, often stolen children's identities, and are claiming refunds they are not entitled to.
The numbers are simply staggering. In a July 2012 report, J. Russell George, the Treasury Department's Inspector General, reported that in tax year 2011, the IRS found it had identified 2.2 million tax returns that were potentially fraudulent, and of this number, about 940,000 returns totaling $6.5 billion in claimed refunds were related to identity theft. Then in addition, George said his auditors uncovered another 1.5 million undetected tax returns with more than $5.2 billion in fraud.
These fraudulent returns fall generally under one of two categories: returns that purport to be from an actually taxpayer claiming a refund to be sent to an address or mailbox controlled by the scammer or directly deposited into a bank account that has been set up for the purpose of receiving false refunds which are then quickly liquidated; or a return with a made up name using a stolen Social Security number — often a child's stolen identity.
"The primary characteristic of these cases is that the identity thief reports false income and withholding to generate a fraudulent tax return," George said. "Without the falsely reported income, many of the deductions and/or credits used to inflate the fraudulent tax refund could not be claimed on the tax return. The individuals whose identities were stolen may not even be aware that their identities were used to file a fraudulent tax return."
In the past four years, he said, the IRS has identified more than 490,000 taxpayers who are the victims of identity theft.
The IRS says it is getting better at identifying fraudulent returns saying in 2011 it handled three times the number of identity theft cases as it did just two years earlier.
But as Inspector General George noted, the first time a taxpayer may have any inkling that their identity has been stolen is when they file their annual tax return only to see it either denied electronically or returned saying the IRS has a return previously filed for the taxpayer.
Then starts a daunting process for all too many taxpayers who must prove they are who they say they are and that the return they are now filing is the true statement of their earnings and withholding and they know nothing of any previous return filed for the tax year in question.
To some extent they are being asked to prove a negative. It has gotten easier since the IRS has set up identity theft bureaus in all district offices. But these offices are swamped and the process takes time and in the meantime the legitimate refund that is being claimed is held up.
I recently came across one account recently in the Sun Sentinel that shows how time consuming this process can be.
Carol Flynn of Davie Florida was a victim when her 2010 return was returned because "she" had filed previously. She got the office of Florida U.S. Sen. Bill Nelson involved but it still took dozens of calls and intervention of Senator Nelson's staff but she finally after months go her federal tax refund plus $18 in interest from the long delayed payment. But she also received notification that she would be expected to pay tax on the $18.
We tend to think of the IRS as omnipotent. How can this be happening that they are paying out not millions but billions to scammers? In my next blog I'll examine that question.