It’s Easy to Steal IRS Refunds

Two years ago we addressed the IRS’s flawed refund procedure in False Refund Schemes and Backwards IRS Return Processing Rules.

Today, Jay Weaver of the Miami Herald gives a distressing update in Scammers Steal IRS Refunds with Ease:

“We are seeing defendants once involved in other types of crimes [such as  drug trafficking] getting involved in identity-theft schemes, because it’s easy  to do, lucrative and less violent,” [U.S. Attorney Wifredo] Ferrer told The Miami Herald.

Ferrer said the tax-return rackets are particularly pernicious because they  harm two victims: legitimate taxpayers whose identities and refunds are stolen — plus the federal government.

“I’m seeing this as a real threat because we’re dealing with a massive  program,” he said.

Indeed, the epidemic of identity-theft and tax-return fraud has spread not  only in South Florida but nationwide.

In September, for example, federal agents arrested 49 people — several with  criminal records — in the Tampa area on charges of stealing identities and using  them to obtain fraudulent tax returns. Investigators in Operation Rainmaker, as  the year-long probe was dubbed, intercepted $100 million and recovered $5  million in fraudulent refunds, cash, jewelry, cars and entertainment  systems.

Here’s how the scheme worked: After making sure a person’s stolen Social  Security number was not used on a tax return, a suspect filed for a refund  through online companies such as Turbo Tax. A tax refund was then issued with a  prepaid debit card, check or direct deposit.

And here’s why it’s happening:

Scammers have… exploited a hole in the IRS electronic filing system, according to the General Accountability Office.

The federal watchdog agency found that the IRS does not actually match tax  returns to the W-2 income forms that employers file until months after the  filing seasons ends on April 15. Employers file them at the end of February or  early March, but the agency does not match them up with incomes reported on 1040  forms until June — way too late to catch identity thieves.

“The refunds go out the door first, and then the matching is done afterward,” Jim White, GAO’s director of strategic issues, said in a report prepared for a  congressional hearing last summer. He said the IRS needs to modernize its  processing system and require employers to file workers’ income statements  earlier in the year.

White said “the IRS could do matching before refunds go out and catch more  fraud,” but he warned “this is something that’s years away.”