The WasteWatcher: The Staff Blog of Citizens Against Government Waste

To Catch a Thief

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


‘Tis the season…for tax refund fraud.  And the 2012 filing season promises to be a whooper when it comes to taxpayers’ refunds being ripped off.

Unscrupulous thieves have sussed out a wide array of schemes using identity theft to file fraudulent tax returns on behalf of unsuspecting taxpayers, get the refunds back quickly, and cash the checks before the real taxpayer even knows that he or she has been taken.  When the authentic taxpayer eventually fails to receive the refund, it can take up to a year and untold hours of bureaucratic wrangling to convince the IRS that he or she is the rightful beneficiary of that refund, at which time the IRS pays the bona fide filer.  The U.S. Treasury is out the money, as well. 

In a July 19, 2012 report entitled “There Are Billions of Dollars in Undetected Tax Refund Fraud Resulting From Identity Theft,” the Treasury Inspector General for Tax Administration (TIGTA) estimated that losses as a result of this type of identity theft and refund fraud will reach an estimated $21 billion over the next five years, and that estimate is based solely upon what is discernible today.  In other words, the IRS doesn’t know what it doesn’t know and $21 billion is a conservative estimate.  The report contains this chilling statement:  “While the amount of fraudulent tax refunds the IRS detects and prevents is substantial, it does not know how many identity thieves are filing fictitious tax returns and how much revenue is being lost due to the issuance of fraudulent tax refunds.  Our analysis of the Tax Year (TY) 2010 tax returns processed during the 2011 Filing Season identified that tax fraud by individuals filing fictitious tax returns with false income and withholding is significantly larger than what the IRS detects and prevents.”

There is an old adage ascribed to the wildly successful bank robber Willie Sutton; when he was asked by a reporter why he did it, he purportedly replied “Because that’s where the money is.”  Whether Sutton said it or not, today’s thieves are clearly motivated by a similar opportunity-driven model.  According to law enforcement officials, “Tax identity fraudsters are apparently drawn by the ease of the crime.”

“The scheme is very basic, it works virtually the same in almost every case,” said United States Attorney for South Florida Wifredo Ferrer.  “All they need is your name and the tax ID number.”  This they achieve by bribing or paying off co-conspirators to purloin taxpayer ID numbers from hospitals, corporations, offices, schools, etc.  Victims include low-income people, the infirm, active duty military personnel, and the elderly, including, in one case, Holocaust survivors at a Jewish Community Center in Florida.  Prisoners are even getting into the act; TIGTA found that during the 2012 tax filing season, more than 91,000 inmate returns claimed $758 million in fraudulent refunds, which was more than double the previous year.

Guidance has been distributed to banks and financial institutions asking them to be on the lookout for tell-tale signs of taxpayer refund fraud.  A February 2013 reminder for the U.S. Treasury Department’s Financial Crimes Enforcement Network cautioned banks to be particularly vigilant about a dizzying range of potentially fraudulent behavior patterns, including “Multiple direct deposit tax refund payments, directed to different individuals…made to a demand deposit or prepaid access account held in the name of a single accountholder…suspicious or authorized account opening at a depository institution, on behalf of individuals who are not present, with the absent individuals being accorded signatory authority over the account….A single individual opening multiple prepaid card accounts in different names, using valid Taxpayer Identification Numbers (TINS) for each of the supplied names and having the cards mailed to the same address,” quickly followed by ATM cash withdrawals.

Fraud prevention recommendations to banks and financial institutions are obviously a rational response to this tsunami of fraud, but deputizing the financial sector and imposing an unfunded mandate on them to prevent these thefts is already one step removed from the epicenter of the fraud and the weak link; the IRS itself.  The IRS should be (and may already be) incorporating these types of filters and anti-fraud fraud mechanisms (and hopefully many more) into its fraud prevention strategy.  While the agency wisely does not divulge the details of current anti-fraud measures, it is hard to understand why it would be difficult to activate a filter to tag as suspicious an unseemly number of returns going to the same address, for example. 

In its testimony, TIGTA documented multiple instances where hundreds, if not thousands of refund checks were mailed to a single address.  In Lansing, Michigan, for example, 2,137 tax refund checks valued at $3.3 million were mailed to one house.  In Chicago, Illinois, one residence received 765 tax returns valued at more than $900,000. 

IRS Inspector General J. Russell George was quoted in a CNBC interview saying, “Once the money is out the door, it is almost impossible to get it back…The bad guys know that the IRS is unable, given the limited number of staff it has, to address every single allegation of tax fraud it has.”  Still, George concluded that the IRS is simply not doing enough to stop identity theft fraud. “Unfortunately, the IRS is not using information that it currently has, nor information that could be available to them.” 

The IRS, for its part, has testified that it is taking steps to mitigate the fraud epidemic before the refund check has been mailed.  TIGTA reported that the agency’s efforts “include designing new identity theft screening filters that the IRS indicates will improve its ability to identify false tax returns before the tax return is processed and prior to a fraudulent tax refund being issued.  Tax returns identified via the new identity theft filters are being held during processing until the IRS can verify the taxpayer’s identity.  The IRS attempts to contact the individual who filed the tax return and requests information that will assist the IRS in ensuring the individual filing the tax return is the legitimate taxpayer.  Once a taxpayer’s identity has been confirmed, the tax return is released for processing and the tax refund is issued.  The IRS removes those tax returns from processing for which the individual’s identity could not be confirmed, thus preventing the issuance of a fraudulent tax refund.  As of April 19, 2012, the IRS has stopped the issuance of approximately $1.3 billion in potentially fraudulent tax refunds as a result of the new identity theft filters.

“In addition, the IRS is expanding efforts to place identity theft indicators on taxpayer accounts to track and manage identity theft incidents.  For example, at the initiation of the 2012 Filing Season, the IRS and the U.S. Department of Justice announced the results of a massive nationwide sweep cracking down on suspected identity theft perpetrators as part of stepped-up efforts to combat tax refund fraud.  The national effort is part of a comprehensive identity theft strategy by the IRS that is focused on preventing, detecting, and resolving identity theft cases as soon as possible.

“Finally, the IRS continues to expand its efforts to prevent the payment of fraudulent tax refunds claimed using deceased individuals’ names and SSNs. Similar to last filing season, the IRS is placing a unique identity theft indicator on deceased individuals’ tax accounts.  The indicator alerts the IRS when a tax return is filed using the deceased individual’s SSN.  According to the IRS, as of March 31, 2012, the IRS placed a deceased lock on more than 164,000 tax accounts and has prevented approximately $1.8 million in fraudulent tax refunds claimed using deceased individuals’ identities since the lock was established.”

The Government Accountability Office (GAO) revealed in a November 29, 2012 report that “Other steps taken in 2012 include temporarily reallocating hundreds of staff from other business units to resolve duplicate filing cases and issue refunds to legitimate taxpayers.  Officials in IRS’s accounts management function told us that in October 2012 there were more than 1,700 staff working to resolve identity theft cases.  Also, in April 2012, IRS began the Law Enforcement Assistance Pilot Program in Florida to help state and local law enforcement agencies obtain tax return data vital to local identity theft investigations.”

Florida is currently the epicenter of the epidemic.  Miami has 46 times the per-capita rate refund fraud and 70 times the national average in dollar terms as any other place in the country and saw 74,496 potentially fraudulent returns generating more than $280 million in possibly bogus returns during the 2012 filing season.  Tampa saw 88,724 potentially fraudulent returns filed, generating refunds of more than $468 million.  Several lawmakers from Florida, including Sens. Ben Nelson (D) and Debbie Wasserman-Schultz (D) have been prompted to act to craft legislation to combat tax refund fraud in the Sunshine State.

Sen. Nelson had introduced a bill in the 112th Congress to address identity theft and tax fraud, but has not reintroduced it yet in the 113th Congress.  However, this session, Sens. Amy Klobuchar (D-Minn.) and Jeff Sessions (R-Ala.) have co-sponsored a bill entitled The STOP Identity Theft Act of 2013 that would “provide effective criminal prosecutions for certain identity thefts, and for other purposes.”

In addition, Sen. Marco Rubio (R-Fla.) sent a letter to the IRS on February 15, 2013 asking the IRS to report back to him on how they were deploying their resources to combat refund fraud this filing season. 

There seems to be plenty of the standard bluster and expressions of outrage over this increasingly widespread predatory behavior, but, aside from several hearings on the topic last year, not much meaningful action to date to identify exactly where the problems are, and whether additional legal authority or resources are in fact needed to combat the problem.  So far, most or all of the bills introduced in the 112th and 113th Congress appear to address narrow slices of the problem and even those have so far achieved little traction. 

An after-the-fact solution that seeks to claw back the stolen money or ups the penalties on the crooks who are gaming the system is not an optimal solution.  The buck must stop at the IRS, where fraudulent returns must be identified and stopped before refund checks or debit cards are issued. 

One useful step would be to have the GAO do a deeper dive to determine whether the Social Security Administration and the IRS are working together cooperatively and with a sense of urgency to authenticate TINs and if not, why not?   

According to some news reports, tax refunds are arriving noticeably slower this tax season.  Much of that delay is the result of the dysfunctional, end-of-the-year  congressional wrangling over the fiscal cliff, which pushed the IRS right up to December 31 before it was able to disseminate tax filing advice to taxpayers and their preparers, but it also indicates that the IRS may be scrutinizing returns more closely to determine authenticity.

Financial services fraud experts are bracing for another significant uptick in tax refund fraud cases this year, but it is unlikely that the public will begin to hear the horror stories or get solid estimates on how much the Treasury has lost until the summer, when the IRS begins a more systematic look back on the tax filing season.  And it will be well after the modern-day Willie Suttons have absconded with the earnings of millions of unsuspecting filers.

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