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26 Jun, 2013

CAGW: U.S. Tax Return Fraud Spiraling Out of Control


WASHINGTON–(BUSINESS WIRE)–Today, in response to this weekend’s revelation that the Internal Revenue Service (IRS) inadvertently sent more than $46 million in tax refunds to “unauthorized” workers at a single Atlanta address, Citizens Against Government Waste (CAGW) issued a statement reiterating the group’s demand that the IRS take steps immediately to stop tax refund fraud.

Since 1996, the IRS has assigned an Individual Taxpayer Identification Numbers (ITIN) to individuals who are ineligible to acquire Social Security Numbers. Unfortunately, according to a Treasury Inspector General for Tax Administration (TIGTA) report released on June 16, 2012 but largely ignored until Friday, the assignment of ITINs is egregiously devoid of internal controls to vet fraudulent applications. As a result, the IRS has been issuing thousands of tax refunds worth millions of dollars to criminals whose ITINs should never have been assigned. At the above-mentioned Atlanta address, the IRS issued 23,994 tax refunds worth $46.4 million to the same location in processing year 2011. That was in addition to 154 different mailing addresses that were issued more than 1,000 ITINs, the top 10 of which received 53,994 refunds worth a total of $86.4 million.

Stemming the tide of tax refund fraud is a complex challenge, but the IRS has demonstrated that it is unable to implement even the most commonsense safeguards and is sending staggering amounts of money to fraudsters whose schemes appear to be fairly unsophisticated. A July 2012 TIGTA report found that a single address in Lansing, Michigan had been sent 2,137 different tax returns totaling $3.3 million. Worse, the June TIGTA report stated that IRS management “created an environment which discouraged employees from detecting fraudulent applications” in which tax examiners receive inadequate training and consistently missed ITIN application errors that should have been routed to a specialized tax examiner. Most damningly, tax examiners’ performance ratings were not negatively affected by the approval of questionable documents or applications.

As CAGW pointed out last year, the amount of federal tax refund fraud is massive and growing. TIGTA Inspector General J. Russell George has estimated that the IRS could issue $26 billion in fraudulent refunds over the next five years, and the number of tax refund fraud cases handled by the IRS has increased 650 percent since 2008. While the IRS claims to have made progress in its fight against tax refund fraud, it straggles light years behind the private sector, having failed to implement basic reforms such as a security system that uses “out of wallet” questions like “What street did you grow up on?” or “What was the name of your first pet?” for identification verification, a practice commonly used by banks and other security-sensitive institutions.

“The IRS is an agency in crisis. In the wake of its recent conference spending and nonprofit targeting scandals, and at a time when it is due to ramp up enforcement of the Affordable Care Act, taxpayers are once again being reminded that the IRS is not very good at its most basic task of collecting and dispersing money to and from the right people,” said CAGW President Tom Schatz. “In response to this report, the IRS will almost certainly blame a lack of resources, but the incentives in place for tax examiners and their inadequate training are the result of bureaucratic incompetence, not a lack of funding. Lawmakers should be leading the charge to reform the IRS’ lackluster fraud prevention system.”

Citizens Against Government Waste is a nonpartisan, nonprofit organization dedicated to eliminating waste, fraud, abuse, and mismanagement in government. To learn more, visit www.cagw.org.