Tax Refund Fraud and What Can Be Done

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The problem of tax refund fraud is not something new. It has been going on since the start of the tax system. But it has been growing at an alarming rate as the economic recession bites. The menace is especially prevalent in Florida where the New York Times recently reported that fraudsters in Florida use addresses for vacant houses, sometimes “even buying mail boxes for them, and collect the refunds there.” The recession has made vacant houses amply available in Florida.

The Treasury Inspector General for Tax Administration (TIGTA) Russell George reported that the Treasury may be losing as much as $5 billion a year in fraudulent tax refunds. Here’s the most common way these scammers obtain tax refunds fraudulently – the scammer obtains a valid name and Social Security number of an individual who does not have to pay taxes (it may even be a deceased person) and uses this information to submit a tax return that comprises of phony wage and withholding information. The scammer then uses e-filing to file the tax return thereby avoiding the need for an actual W-2 form, claims a few deductions and tax credits to produce a larger refund, and waits for the refund that will be deposited electronically. Scammers also use debit cards to withdraw money from the bank accounts.

The IRS has been trying to stem the tide of rampant fraudulent refunds by stopping refunds going to deceased people, for example. But it takes more than merely the efforts of the IRS alone to eradicate this crime. For the past four years, the IRS has sought permission from Congress to refer to the Department of Health and Human Services’ National Directory of New Hires, a database of wages and employment to match the information on tax returns with actual jobs. If this can be done, the IRS would be able to identify false W-2’s submitted by fraudsters. But until now, Congress has not granted permission for the IRS to access this database.

Ideally, the IRS should have the means to match W-2 information with tax return information it receives in order to correctly issue a tax refund. But W-2’s are sent to the Social Security Administration (SSA) by February (for those not submitted electronically) and March (for those filed electronically). So if the IRS wishes to gain information from the W-2, the IRS computer systems must be made to synch with the SSA ones and W-2’s must be sent to the SSA at the same time as they are sent to workers. Inevitably, this would require more effort on the part of employers and costly upgrades of the IRS and SSA computer systems.

The TIGTA has made numerous recommendations over the years to fight this crime. Among them are:

• requiring tax refunds to be deposited into an account only in the name of the individual listed on the tax return
• limiting the number of deposits into the same bank account
• the Treasury require financial institutions to verify the identity of debit card purchasers

The TIGTA also reports that some scammers are tax preparers, which is why the IRS is taking steps to regularize the entire tax preparer industry. Some scams are committed by individuals masquerading as IRS officers to obtain taxpayers’ confidential information. The more difficult type of fraud to eradicate is the “inside jobs” where IRS employees themselves are involved.

But with more resources and changes in legislation, the IRS can do a lot more to combat this crime.

 

Published In: Civil Remedies Updates, Criminal Law Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Darrin Mish, Tampa Tax Attorney, The Law Offices of Darrin Mish, P.A. | Attorney Advertising

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