The problem of fraudulent income tax returns seeking refunds continues to grow almost experientially. But according to IRS officials, the agency is developing new ways to identify fraudulent returns, and to stop fraudulent refunds being sent out.
The numbers are still staggering. According to a study from the Government Accountability Office (GAO), from January to September 2012 close to 642,000 identity theft incidents involved tax fraud were identified by the IRS. That is a 62 percent increase from the prior year. The number of incidents of identity theft-related tax fraud has increased from about 51,700 cases in 2008 to more than 1.1 million cases in 2011.
In that same time period, the IRS paid out at least $754 million in suspicious tax refunds, the GAO said. In 2011, the IRS was successful in blocking around 262,000 in fake tax returns, yet it still lost an estimated $5.2 billion that year due to identity theft.
At the end of September the IRS had nearly 650,000 identity theft cases in its inventory, many with an average clearance time of over 6 months, according Nina Olson, taxpayer advocate at IRS.
In late November, a subcommittee of the House Oversight and Government Reform Committee held a hearing on the problem. The IRS told the subcommittee it is very aware of the problem and the predictions it will be sending out billions in fraudulent refunds over the next five years.
Part of the problem, said the IRS, is that it is understaffed because Congress decreased its budget in fiscal 2012 by about $350 million. The agency has shifted more than 3,000 employees to deal with identity theft issues, but this has sharply reduced the number of normal audits being conducted.
I often see reports that some individual or identity fraud gang has been arrested and it is found that huge numbers of fraudulent refund checks were sent to the same address or deposited in a single bank account. In one recent Florida case, more than a thousand refund checks went to the same address.
The IRS has said its computers were simply not programmed to catch duplicate addresses. But this is now changing. The IRS computer system is adding two more filters to the 13 screening filters it has been using. The new filters look for multiple refunds being sent to one bank account or refunds going to the same address.
In addition, the IRS is working with banks to uncover fraud. This year the IRS received information from 116 banks on more than 193,000 accounts possibly linked to refund fraud.
The IRS complains that in its efforts to combat fraudulent returns it is forced to operate with "one hand behind our back," as Russell George, Treasury inspector general for tax administration told the House subcommittee. The problem is by law and regulation the IRS is denied access to certain government databases that would be of great help in detecting fraudulent returns. One such database is Health and Human Services Department's National Directory of New Hires' wage information. By law, the IRS cannot access this database, or use information from it. George said lawmakers should change the law if they are serious about stopping fraudulent returns.