In a kind of bizarre and complicated turn of events, the current log jam in Congress over taxes and spending, the so-called "fiscal cliff," may have the unintended result of helping the IRS stem the flow of fraudulent tax returns next year.
It all has to do with the Alternative Minimum Tax (AMT). According to acting IRS Commissioner Steven T. Miller unless Congress acts by the end of the year to prevent the AMT from expanding, perhaps 60 million taxpayers — mostly in the middle class — will not be able to file their 2012 returns or receive their refunds until March. That is nearly half of all U.S. taxpayers.
Miller explained that the IRS has decided not to reprogram its computer systems to account for the potential expiration of legislation that limits the AMT to about 4 million taxpayers. Without the renewal of the legislation, the AMT will suddenly affect about 33 million taxpayers in the 2012 tax year. If this happens, the IRS computers will not be ready until at least March to process the deluge of returns including the AMT for the first time.
How does this potentially affect the filers of fraudulent returns? It does in several ways. Firstly, look at the way the fraudsters prepare returns. Using a stolen or phony name and a stolen Social Security number they prepare a return saying they are employed by the so-and-so company made x amount last year, had y amount withheld from their paychecks, had certain deductions and therefore are entitled to a certain refund.
One key is for the fraudsters to file early so the phony return beats the return from the real taxpayer. If the IRS is not accepting returns until March, in many cases both the real and fraudulent return will hit the IRS computers at the same time and be spit out with the phony return obvious.
Also if this not-until-March scenario unfolds, many employers will have filed earnings and withholding data for their employees and it will be easier to pin-point the fraudulent returns.
In order to generate a sufficiently large refund, the fraudsters usually use rather large numbers in terms of income, withholding and deductions. If the AMT is expanded, it could affect many phony returns greatly lessening the anticipated "refund." But more to the point, unless the fraudsters account for the AMT, the returns will be rejected.
So we'll have to wait and see what happens.
The IRS says that whatever happens regarding the AMT it is going to be ready to stem the flow of fraudulent refunds next year and both the Justice Department and the Federal Courts are now there to help. I'll look at these efforts next week.