TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, November 29, 2011

Scammers Steal IRS Refunds With Ease

IRS LogoMiami Herald, Scammers Steal IRS Refunds With Ease:

Identity-theft crimes have soared in the electronic age, with crooks graduating from everyday credit-card fraud to stealing people’s identities such as Social Security numbers for income tax-return scams.

Almost one year ago, in broad daylight, North Miami postal carrier Bruce Parton was killed for his key — a master key, authorities say, that unlocked personal financial information to residents of a North Miami-Dade condo building.

The two men charged with the 60-year-old’s murder used his so-called Arrow Key to steal the information from dozens of residents’ mailboxes. Like magic, the pair converted the identities of others into an electronic stream of cash, by filing fabricated income tax returns in the victims’ names over the Internet, according to court documents.Their unwitting accomplice turned out to be the Internal Revenue Service. The IRS, without verifying their false income claims, loaded the refunds onto debit cards the men allegedly used in others’ names at Winn-Dixie supermarkets, 7-Eleven convenience stores and Chase Bank, records show.

Scammers have, in fact, 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.”

In the meantime, everyday criminals are moving into the identity-theft rackets, using computers, the Internet and online tax services to fleece the IRS -- and taxpayers. The GAO reports that the number of identity theft-related fraud incidents on tax returns reached 248,000 last year, about five times more than in 2008.

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