The Ethics of Flopping
ITT/ESI Fraud Investigated by the SEC

Tax Fraud on the Rise: Surprise, Surprise

IRS Paid $5.8 Billion in Fraudulent Refunds

I recently read that the IRS paid $5.8 Billion in fraudulent refunds from 2011 through October 2014. Over time, the IRS has stopped 19 million suspicious tax returns and protected more than $63 billion in fraudulent refunds. This past tax filing season identified new and alarming incidences of identity theft. There has been a big uptick in fears about fraud. There was nearly a bank run when TurboTax had to suspend filing state tax returns over fraud concerns. Imagine if you found out that someone had filed ‘your’ tax return in your state and scooped up your refund.

The Government Accountability Office has released a new report. Even though it is based on past numbers, it is revealing. The IRS is wracked by budget cuts, and has all the usual tax season issues of seasonal employees and technical problems. This year, it was made worse by additional burdens of implementing Obamacare, coupled with a sharp increase in identity fraud filing problems. It’s not a pretty picture, and the report says change is needed.

Here’s something you may not know. The IRS does not check the W-2 or other tax data in the return until after it issues the refund. This is why tax fraud via identity theft is so prevalent — so little of the data is verified before the e-file is accepted and the refund issued. There are myriad solutions to this problem, but they all require additional effort from some combination of IRS, payroll providers, employers, and tax software companies. Typically, ‘identity theft refund fraud’ occurs when an identity thief uses a legitimate taxpayer’s identifying information. The thief files a fraudulent tax return and claims a refund.

The first clue you will have if you are a victim comes when you file your tax return. If you e-file and your identity has been stolen, your return will be rejected by the IRS. If you originally mailed your tax return, you will receive a notice in the mail from the IRS stating that someone has already filed using your Social Security number.  

If this happens to you, act fast. Acting quickly and alerting your financial institutions and the credit reporting agencies to the fraud can help stop thieves from opening new accounts. Thieves don’t just use your information once – they use it again and again. The faster you respond, the less time they have to do damage.

The IRS wants to combat identity theft-related tax fraud, but the GAO says the IRS lacks a good estimate of the costs, benefits and risks. A lot of the GAO’s critique has to do with assumptions and uncertainties.

GAO says the IRS hasn’t assessed the level of uncertainty in its numbers. The culprits, say the IRS, are its resource constraints as well as methodological challenges. Yet the GAO report says this could matter—a lot. Making different assumptions could affect identity theft tax fraud estimates by billions of dollars. The GAO recommends that the IRS improve its fraud estimates and document its underlying analysis. The IRS has agreed.

The IRS suggests protecting yourself. (Really, does anyone believe it would say to not protect yourself?)  Here is the wisdom imparted the IRS:

  • Don’t carry your Social Security card or any documents that include your SSN or Individual Taxpayer Identification Number (ITIN);
  • Don’t give a business your SSN or ITIN just because they ask. Give it only when required;
  • Protect your financial information;
  • Check your credit report every 12 months;
  • Review your Social Security Administration earnings statement annually;
  • Secure personal information in your home;
  • Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts; and
  • Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with.

Be on guard if you receive a notice from the IRS or learn from your tax professional that:

  • More than one tax return was filed for you;
  • You owe additional tax, have a refund offset or have had collection actions taken against you for a year you did not file a tax return;
  • IRS records indicate you received more wages than you actually earned; or
  • Your state or federal benefits were reduced or cancelled because the agency received information reporting an income change.

Victims of tax-related identity theft should:

  • File a report with your local police;
  • File a complaint with the Federal Trade Commission (FTC) or the FTC Identity Theft hotline:
  • Contact one of the three major credit bureaus (Equifax, Experian, or TransUnion) to place a “fraud alert’ on your account; and
  • Close any accounts that have been tampered with or opened fraudulently.

Tax fraud is a huge and increasing problem. The billions that are stolen come from our pockets. IRS needs to lead the way in implementing solutions that for both tax preparers and tax payers before it gets even further out control. 

Why is tax fraud increasing? Perhaps a better question is why is any form of fraud increasing?  It reflects the general ethical decline in society. If it is true, as some contend, that more people today than ever before want something for nothing, then it’s not surprising that identity theft is the chosen choice of tax fraud. We will not solve any of the fraud problems any time soon, especially in taxes because our tax system is based on ‘voluntary’ compliance.

Blog posted by Dr. Steven Mintz, aka Ethics Sage, on June 4, 2015. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: