IRS Sees Surge in Identity Theft Tax Fraud

Fake tax returns quintupled last year, causing serious processing delays and erroneous payments. The move toward electronic tax filing has opened the door for identity thieves to file tax returns using social security numbers that belong to victims. When the victims of tax-related identity theft file their tax returns, those victims learn that their taxes have already been filed and that their refunds have been issued via direct deposit to an unrelated bank account. IRS documents now list identity theft as the top tax scam it faces.

A Serious Problem

Random theft of social security numbers and other personal information precede many of these fraudulent returns. Unfortunately, many people become deceived into volunteering important information to identity scammers that make fraudulent tax returns easy to file.

Last year, the IRS stopped about a quarter-million fake tax returns, saving more than a billion dollars. In 2010, IRS personnel found less than fifty thousand fake returns. IRS numbers do not estimate how many fake tax returns were actually processed and paid. Because of this lack of information, the amount of money stolen through tax-related identity theft remains unknown.

Losing the Battle

Out of the hundreds of thousands of identified fake returns, the IRS has filed charges against 105 perpetrators. Although the IRS wants people to know that the much-feared government agency will not tolerate fake tax returns, the fact that it has investigated less than .04-percent of known cases sounds like encouraging news for would-be tax-refund thieves.

The Daily Mail says that about 100 million tax returns flow through the IRS every year. This means that about 2.5 percent of all tax returns have been identified as fake. Assuming that the IRS catches fewer than half of all fraudulent returns, the problem of tax-related identity theft could have grave implications.

Like screening measures at the airport, IRS systems could hopelessly delay the processing of returns by the agency as it aims to reduce the number of fraudulent returns it approves. In most cases, spurious returns probably have refunds associated with them, but scammers might add some tax liabilities to through off suspicion. Fraudulent filers can also submit malicious tax returns in an effort to cause problems for other people.

I Didn’t Do It!

Now that identity theft via online tax filing has become a known problem, tax filers everywhere can now use identity theft as a defense against an audit. The IRS does not have a way to prove who transmitted a phony return, especially when scammers use public computers and online tax services.