Scam artists conned the federal government out of at least $5.2 billion in fraudulent tax refunds last year—and though that estimate is shocking enough—the amount is likely much higher, auditors warned on Monday.
Identity tax refund fraud has ballooned in recent years as electronic filing gives thieves an easy way to use stolen social security numbers and simply file phony tax returns. Though the electronic filing has made the tedious process more bearable and user-friendly for taxpayers, it has also made it much easier for criminals to scam the system.
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Thanks to electronic filing, fraudsters armed only with laptops or smart phones can steal millions of dollars from taxpayers—all from the comfort of their own homes.
“I could wake up in the comfort of my own home, and just get on a laptop, do about 15 returns a day,” a former tax scammer, Corey Williams, told 60 Minutes. “Fifteen times $3,000 a return, that's $45,000 a day,” he said, adding that he raked in this money (which is just under the annual salary of an average American worker) while “wearing boxers and a t-shirt.”
Williams said fraudsters buy or collect a list of stolen identities by offering say a person in the billing department of an insurance company or a doctor’s office a $1,000 for a list of names and social security numbers; then they go to one of dozens of tax preparation websites and fill out bogus W-2 forms—claiming modest refunds of around $3,000 – 4,000. They tell the IRS where to send the money, whether it’s to their home addresses, bank accounts or prepaid debit cards that can quickly be discarded.
Williams said the IRS sent him tax return money about 40 percent of the time. And it only took about seven days.
In 2012, Treasury Department auditors found that the IRS issued more than $3.3 million through 2,137 tax refunds to a single address in Lansing, Michigan.
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So how are these fraudsters able to pull this off without raising suspicions from the IRS? One reason is the software used by the IRS is not programmed to kick back or stop claims with suspicious data. That’s what credit card companies like Visa and American Express are able to do through sophisticated algorithms that verifications.
A new report from the Government Accountability Office suggests that fraudsters are easily taking advantage of the IRS’s “look back” compliance model—where the agency issues refunds after conducting only selected reviews. For its part, under this process, the IRS prevented another $24.2 billion from being lost to fraud.
Still, the GAO said auditors should hold refunds until completing all compliance checks. The problem is, under federal law, the IRS is required to send out refund checks within six weeks. This often doesn’t give agency enough time to check documents like W-2 forms—which aren’t usually issued until months after the filing deadline.
GAO auditors recommended that the IRS should “assess the costs and benefits of accelerating W-2 deadlines” as well as provide information to lawmakers on the processes that would be need to be adjusted to accommodate that or pre-refund matching W-2 forms.
Others don’t think it’s that simple.
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Andy Bucholz, Vice President, Government Solutions at LexisNexis Risk Solutions, said zeroing in on just the W2s “underestimates how smart the fraudsters are.”
“Hackers will just start to hack HR departments to get that information,” Bucholz said. “To me the real problem is with self-reported data.”
The federal government and a handful of states have enlisted a number of private companies like Lexis Nexis, IBM and SAS in the fight to curb tax fraud. The tech companies use software to run tax returns through algorithms designed to detect fraudulent claims. When claims raise flags, the tax filer in question is required to verify information by logging onto the IRS website and answering questions based on public records before he or she can collect their return.
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Though most media attention has focused largely on tax return fraud, Bucholz stressed that the government’s fraud problem is much, much bigger.
“The real story is identity theft in general. It’s the fastest growing, largest crime that is highly unmeasured,” Bucholz said.
“Identity thieves are going online and targeting every major federal program-- like unemployment benefits, food stamps, student loans and “anything the government is giving away,” Bucholz said. “Now when they offer this stuff online where they don’t authenticate people, it’s made the crime easier.”
There have been a whole spate of identity theft cases—including one where the Attorney General Eric Holder himself was a victim, according to the Department of Justice.
IRS officials have acknowledged the ongoing problem and say “identity theft remains a top priority” for the agency.
“Despite continuing budget challenges since FY 2010, the IRS continues to devote major resources to this priority area,” the IRS said in a statement. “So far in Fiscal Year 2014, the IRS has initiated more than 900 new investigations into identity theft and refund fraud schemes, bringing the total number of active cases to more than 1,900.”
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