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Where’s My Refund?

By Dr. Anita Morgan, DBA, CPA, CFE

As if taxpayers don’t have enough to stress about at tax time, here is one more thing to worry about: Incidents of tax refund identity theft are on the rise. In 2010, 15 percent of identity theft complaints were related to tax returns; by 2013, this had risen to 43 percent. The IRS reports that there were 1.6 million victims of tax refund identity theft in the first half of 2013. If not deterred, in the next five years, the IRS could issue as much as $21 billion in fraudulent tax refunds.

How Does This Happen?

Often, this fraud begins with the identity thief sending a text or email to the taxpayer claiming to be the IRS and providing a link to a website. Clicking on the link puts malware on the taxpayer’s computer that collects personal information that can be used to file a tax return. Others use other means to steal Social Security numbers and use them to file fraudulent returns.

The identity thief files a tax return before the taxpayer and collects the refund. When the taxpayer files his return, he will receive notification from the IRS that a return has already been filed. While most taxpayers who are victims of this crime eventually receive their refund, the average delay is 180 days.

This type of fraud attracts people who are typically not associated with white collar crime. In Miami, drug gangs are getting into the tax fraud business.[2] They steal Social Security numbers and file large numbers of tax returns for thousands of dollars in refunds.

Tax return identity theft is possible because the IRS is mandated to issue refunds as returns are received. If refunds were held until the April 15 deadline, the incidence of fraudulent refunds would be significantly reduced because the IRS could investigate duplicate returns to identify the correct taxpayer. This would also allow the IRS to receive and process income documentation prior to issuing refunds. In the current system, the IRS may not receive and process income documents until after a refund is issued.

In an article published in The Boston Globe[1], former IRS commissioner Lawrence Gibbs is quoted as saying, “When the IRS gets a return that claims a refund, the IRS does not have the ability to check that the taxpayer is entitled to the refund, that it is a real person. They don’t have records to say whether the person claiming the refund is entitled to it. They just send the check. The crooks found out it was nirvana, and as a result you have seen a massive influx of fraud.”

How to prevent thieves from targeting your tax return.

What is the IRS Doing to Combat This?

The IRS has implemented new software filtering and tracking systems to protect taxpayers. A recent report stated that the IRS identified nearly 580,000 fraudulent returns claiming a total of $3.6 billion in refunds during last year’s tax filing season.

Additionally, it provides information for taxpayers on its website and in YouTube videos on how to protect themselves from identity theft. It also provides assistance on the website for tax preparers on how to identify fraudulent returns.

Is this enough? Why is the IRS held to lower standards of internal controls? Controls over accounts payable in a corporation at least require documentation before invoices are paid. Why would we expect the IRS to pay refunds before they can even verify the income? This makes no sense to me.