A Beleaguered IRS Serves Up Billions in Fraudulent Tax Returns

Identity thieves who have fallen on hard times, take heart. The IRS could be the answer to your prayers.

The IRS may have delivered more than $5 billion in refund checks to you and your compadres who took the initiative to file fraudulent tax returns in 2011, according to Treasury Department investigators.

Keep your nose to the grindstone, and you’ll see a windfall in the next five years, when an estimated $21 billion could head your way, according to The Associated Press.

It’s easy to take potshots at the IRS. But in all seriousness, Congress needs to take swift action and provide support, or consumers will lose faith in the U.S. tax system.

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The Associated Press reports: “Although the IRS detected about 940,000 fraudulent returns for last year claiming $6.5 billion in refunds, there were potentially another 1.5 million undetected cases of thieves seeking refunds after assuming the identity of a dead person, child or someone else who normally wouldn’t file a tax return.”

U.S. businesses look out for obvious signs of fraud, or “red flags,” to help prevent credit-related losses. It’s about time the IRS started following suit. In fact, there is even a specific “Red Flags Rule,” which is part of the Fair and Accurate Credit Transactions Act. It requires companies to institute programs that make it easier for them to detect identity theft red flags in their daily operations. At the very least, the IRS should have something similar in place—guidelines to help easily spot signs of trouble.

It doesn’t take a fraud expert to figure out which returns are fraudulent. Case in point, there was one instance where the IRS sent more than $3 million to an address that was used to file 2,137 tax returns. You would think that a mere 50 tax returns originating from the same address would be enough to trigger an inquiry, but apparently not. Another example cited a situation where three addresses were used for 500 returns that totaled more than $1 million in refund money. Again, chances are that when you have that many tax filers under one roof, they probably aren’t roommates or members of the same family filing separately.

The simple reality is that the IRS needs more resources. More employees are needed to research filings and weed out fraudulent returns. Better systems are needed to weed through the data and spot these aberrations across various tax filing/processing centers. The resources we devote to this problem now will not only pay off, it could save taxpayers billions.

Thieves are also exploiting vulnerabilities in the way the IRS delivers refunds, according to investigators. Many cases of potential fraud involve the use of direct deposits and pre-loaded debit cards. If the IRS is going to continue to deposit returns on debit cards they need to have a maximum amount or a cap.

Frankly, the IRS should be spending more time and resources on tax-related identity theft prevention than it does auditing taxpayers. It seems to me to really be the best way to spend our tax dollars.

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This is an Op/Ed contribution to Credit.com and does not necessarily reflect the views of the company. The column was originally published on Identity Theft 911 blog.

Image: Rojer, via Flickr