The IRS Just Can’t Keep Up With All These Potentially Fraudulent Tax Returns

If you’re one of the two million people who filed a potentially fraudulent tax return last year, well, you’re causing the Internal Revenue Service to have a really rough time. That number is a sharp increase, up 72% from the previous year, and it’s giving the IRS a huge headache as it struggles to keep up.

Beyond those two million, another almost one million returns were identified as being part of the “Operation Mass Mail” scam where tax cheats submitted fraudulent returns that were automatically voided before they even made it to the processing stage, reports CNNMoney. These numbers are according to a mid-year report to Congress from the Taxpayer Advocate Service, the taxpayer watchdog arm of the IRS.

So why this sudden uptick in tax fraud? Many variables could be in play here, says the TAS — the popularity of electronic filing, higher dollar amounts of refundable credits and a growing number of people using debit cards to receive refunds.

The IRS is also on the lookout for tax prepares who file improper forms and claim false refunds on behalf of their clients. Identity theft is another problem — someone could steal your information and file a tax return to get your refund. There were more than 450,000 of these cases, said the IRS.

“The IRS is experiencing unprecedented backlogs in return processing because of identity theft and other refund fraud, is instituting ‘hard freezes’ on questionable returns because it cannot timely address them and is unable to answer anywhere from an average of about 30 percent [of calls] overall in fiscal year 2012 to a low of 65 percent of calls [for one customer service department],” TAS said in its report.

That backlog boils down to the IRS only answering one in nine calls from taxpayers whose refunds were being held, and those who did get through to a representative spent an average one hour waiting on hold.

Some legitimate returns were also held, causing problems for taxpayers trying to receive their funds. In cases of identity theft, the victim and the fraudulent filer both have their returns put on hold while the fraud is being investigated. Trying to stop fraudsters from getting money while also sending out payments to rightful filers is proving quite taxing for the agency.

“[T]he IRS must somehow prevent refunds from going out on over two million bogus claims — and at the same time quickly process returns and issue refunds to the over 145 million individual taxpayers who file legitimate claims,” TAS said in its report.

It might just get worse, as the IRS’ resources shrink and its added responsibilities have it racing to keep up and prevent delays. The TAS report said it’s concerned that this will all happen again next year, especially if Congress doesn’t extend many tax provisions that are scheduled to expire at the end of the year.

IRS struggles to keep up amid surge in tax fraud [CNNMoney]

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  1. Blueskylaw says:

    So initially the IRS thought that doing everything electronically would save them money in labor costs when in actuality, because of their decision, they are now short staffed and need to hire more people.

    • SirWired says:

      It does save money! But the people that transcribe paper returns into the computer have already been laid off (or, if they were contractors, their contracts not renewed.) Extra customer service people to deal with fraud are a separate budget line item that congress has to specifically authorize. What I suspect happened is that the IRS reduced their funding request for return transcribers, and separately congress denied funding to hire additional customer service people. (Return transcribers can’t be re-assigned to customer service without budget authorization saying they can…)

    • eeelaine says:

      Even though the IRS has one of the best return on investments for any government program, Congress still decided to cut their funding this year. Less money = less staff, so tax cheaters are more likely to get away with it, and every day people are less likely to get help.

      Cutting money to enforcement agencies without simplifying the process that they are trying to enforce is a terrible idea, but apparently that concept is beyond the grasp of many.

      • Blueskylaw says:

        This idea has a very scientific name: Kicking the can down the road.

      • MaytagRepairman is stealing your socks while fixing your dryer. says:

        I don’t think congress ever wants the IRS to have it too easy. After all, the IRS looks at their tax returns for fraud too.

      • RvLeshrac says:

        The people who most recently worked on the budget are the same ones who want the IRS to fail at its duties, no surprise there.

        These are the same people who placed irresponsible, unrealistic pension holding requirements on the USPS, driving it into near-bankruptcy.

  2. AtlantaCPA says:

    The penalties for tax cheats should be made several times more severe. I’m not talking people messing something up accidentally but the real cheats (fraudulent returns, claiming big deductions for fake stuff, etc). Give judges the latitude to put people away for life and fund a big increase in IRS enforcement for a few years. I can’t imagine that it wouldn’t pay for itself in a few years after the fraud goes down.

    • wade says:

      I’m totally on board with this idea. In some respects, cheating on your taxes mirrors counterfeiting currency in that, when successful, it devalues the monetary supply (albeit a little less directly), and counterfeiting is one of the few crimes that the feds truly bring the hammer down on.

      On the other hand, we would really need to clean up the tax code so that honest people would still be able to do their taxes without being afraid of going to jail for 25 to life.

      • RvLeshrac says:

        Err… honest people have nothing to worry about. No one is imprisoned or fined unduly for *honest* tax issues, such as filing 1099-INTs for the wrong year, or not realising you need to report that $50 you made on your .01% savings account. The IRS has plenty of power to negate penalties.

        The problem is when people try to get cute with their taxes, such as filing HoH when they don’t know whether or not they qualify, or filing exemptions for children which aren’t legally theirs (using the unemployed neighbour’s kids, for example). I’ve seen plenty of that.

        • Cerne says:

          Yeah no honest person has ever being unduly hassled by the IRS. The IRS is your friend and only has your best interests at heart. Trust the IRS. Love the IRS.

      • Cerne says:

        Actually denying the government money is nothing at all like devaluing the money supply through counterfeiting. That money still exists and it’s still used.

    • Phred says:

      Putting people away for life is incredibly expensive. I’m no number cruncher, but I’d like to know if the cost for prison outweighs whatever other costs there are.

      • HSVhockey says:

        How about instead of putting them away for life, how about we just exile them?

      • AtlantaCPA says:

        I don’t have access to the right numbers, but I’m guessing that stopping hundreds of millions of dollars in tax fraud is worth the millions it would cost to incarcerate the examples. My gut instinct is that right now the penalties are too low to act as a deterrent.

    • Cerne says:

      Yeah bigger, more powerful government is always the answer. I mean everyone is always talking about how too few Americans are in prison.

    • I look at both sides of the story says:

      “Give judges the latitude to put people away for life”

      On so many issues, the “put ‘em away for life” suggestion is made when the USA has one of highest (if not the highest) prison population in the world.

      Eventually, everyone will either be in prison or working for a prison.

  3. wade says:

    To paraphrase Wilde, it seems that the bureaucracy must expand to meet the needs of the expanding bureaucracy.

  4. deadandy says:

    In the non-identity theft cases, how do they tell the difference between a fraudulent return and one where the person just didn’t do it right? I read in the Economist that the error rate is way up now too, because people depend on the electronic programs to catch all their mistakes.

    • eeelaine says:

      And if you don’t have the resources to sort out the good apples that just made a mistake from the bad tax cheats, you are stuck between trying to nail everybody (which is unfair to the good apples) and letting the bad apples get away (which is unfair to everyone)

    • frodolives35 says:

      About 10 years ago I used a broken calculator to do my taxes. There were errors as the 4 always displayed 8. The irs re-figured and I got about $180 bucks extra on my return. The next year my wife made me go to HR Block. The IRS actusly has down me right a couple of times even if it feels really strnge to say that.

  5. redskull says:

    We could always go the China route and make it a death penalty offense.

    • Phred says:

      Assuming you’re serious, this would require a constitutional amendment since the Supreme Court has outlawed the death penalty for crimes where no one else was killed (such as rape). Possible, but not easy.

  6. HogwartsProfessor says:

    “The IRS is also on the lookout for tax prepares who file improper forms and claim false refunds on behalf of their clients.”

    This keeps my recently former bf busy. Investigating is his job.

    God, I miss him. I’m so fucking miserable. :'(

    • Coffee says:

      Awwww…I’m sorry, Hogwarts…I would wish hateful things on him, but I don’t know if that would make you happy. Instead, I will send healing thoughts your direction :(

    • frodolives35 says:

      2 words MO MONEY. For those not in the know they were shut down by the IRS this year for fraud. Who takes their taxes to a place named MO MONEY anyway. Go figure.

      • RvLeshrac says:

        Mo’ Money’s only issue was that they were overpromising on delivery of returns.

        Anyone who says otherwise has *no idea* how eFiled taxes with Rapid Refund and other options actually work.

        Signed, someone who provided support for a large commercial tax software package this past filing season.

  7. SirWired says:

    This is a no-win situation for the IRS.

    If they curtail electronic filing, they’ll get beat up for not staying in the 21st century.

    If they take on a “pay first, ask questions later” policy, they’ll get slammed for too-easily paying out fraudulent returns.

    If they hold up refunds, they get slammed for poor service even if they don’t have funding to hire the people needed to work this out.

    • RvLeshrac says:

      eFiling is here to stay. The problem the IRS has is that eFiling isn’t *mandatory*. Millions of man-hours are wasted trying to process paper forms and decipher shitty handwriting.

      They already operate on a pay-first policy. Unless there’s an obvious issue, the return is paid out almost immediately upon processing, if eFiled with direct deposit.

      Refunds are only held in cases of fraudulent activity or return errors. The IRS gets consistently high marks for service, they’re one of the highest-rated sections of the government for that.

  8. Bsamm09 says:

    Had a client this year who had his SS# used and filed a fraudulent return. Had him down for $45,000 in wages and a bunch of kids. They claimed a refund and got something like $7,500 back.

    That raised red flags at the IRS quickly. He had paid $650,000 in estimated taxes so far and none of his partnerships or S-corps had filed their returns yet so they knew it was bogus. They contacted us a few days after it was filed.

  9. mentok1982 says:

    Instead of trying to process all the returns the IRS could just send everyone 300 dollars in the form of a Tricky-Dick Fun Bill!

    http://futurama.wikia.com/wiki/Three_Hundred_Big_Boys

  10. kevinroyalty says:

    so a flat tax would clear this up pretty quick….

    • Lyn Torden says:

      no tax would work just as well, if not better

      • Evil_Otto would rather pay taxes than make someone else rich says:

        Back under your bridge!

        • TasteyCat says:

          Prior to 1913, there was no federal income tax. The nation ran fine for 100+ years.

          • SabreDC says:

            Yep. And in 1913, there were no interstate highways, air traffic, nuclear weapons, Internet, cell phones, GPS, space research, minimal health/disease research, and very few jobs required higher education. And there were fewer than 11 federal prisons to manage.

            Define “ran fine”? You’re welcome to live your life like it is 1912 if you’d like. Break out the Olds Curved Dash and travel the countryside at a top speed of 20 mph on your way to the newly added state of Arizona.

            • TasteyCat says:

              Our forefathers were able to make great strides without burdening the population with excessive taxes and debt. In 1912, you would have been saying the same thing you are now about 1812. Although there is some argument to be made that we are better off now because of the federal income tax, there is also argument to be made that our tax and spend philosophy is what will lead to the fall of the American empire. Unfortunately, most of us have learned nothing from Greece or the failed empires before it. The federal government is supposed to provide for the national defense and maintain sound monetary policy. They should not be involved in 90% of the nonsense they are involved in.

              • RvLeshrac says:

                1912 was really not much different from 1812.

              • SabreDC says:

                There is far more in the US Constitution than just “providign for the national defense” and “maintaining sound monetary policy”. You’re leaving out the more applicable “provide for the…general Welfare of the United States…” portion of Article I, Section 8. Education, infrastructure, health, parks, etc. all fall under that. The federal government is meant to provide uniformity for issues across state lines.

                You’re right. I would definitely have said this in 1912 about 1812. Because times have changed. Industry has changed. Scientific advancements have changed. If I live to be 130, I’ll say this in 2112 as well.

                The problem I have with your statement is that YOU are not the one that gets to decide what is “nonsense” and what is not. The key aspect of living in a society is that it requires parties of that society to maintain solidarity and take care of one another. That’s the whole purpose of living in a society. I promise you: you can get everything you want if you distance yourself from society and become a hermit. You will not be required to take care of your fellow man, pay for the educations or healthcare of others, etc. if you’re not part of a society.

                We are nothing like Greece because part of their failure is due to LYING about their economy’s strength to circumvent the Maastricht Criteria to gain entry into the Eurozone. Weaker economies want into the Eurozone to take advantage of the stronger economies. Stronger economies want to keep weaker economies out. The failure of Greece is the result of FAR more than just “tax and spend”. It’s apples and oranges.

    • McRib wants to know if you've been saved by the Holy Clown says:

      Because nooooobody would EVER lie with the flat tax.

      NOT EVER, NEVER, EVER.

      • George4478 says:

        If only there were some middle ground between ‘rampant tax fraud’ and ‘absolutely zero tax fraud’…..

    • bnceo says:

      And close some loopholes and subsidies as well. Paying taxes should be a cake walk in the park. But instead, all these congressman keep adding silly amendments to bills for their constituents and keep muddling up the tax code. $40 of you have a pig. $50 if you raise one cow. $80 for two cows! Size of your solar panel = more more more $$$$ back. Ugh. So confusing. Just give me a %, let me pay it. Boom. Done. House credits? Why? I bought a product, I negotiated a price. I agreed and paid for it with a mortgage. Do I really need a tax credit on it? Same with a car.

      • RvLeshrac says:

        Tax filing software which is simple and does everything for you, if you answer questions honestly, is $40. It may even be free.

    • SirWired says:

      Exactly how would it clear things up? The problem here is somebody claiming refunds they aren’t due, not overall tax complexity.

  11. Sarek says:

    Yup, this happened to me:
    E-filed 1st week of March for a refund.
    Got a vague letter the 2nd week of April – call us. Well, I tried. And tried. And tried. Repeat.
    Eventually, I went to the downtown IRS office. The agent there had no idea what the letter was about, but eventually told me he couldn’t help me and I had to call the number there.
    So GOTO STEP 2 and repeat as needed. Eventually, someone actually answered. Then I was on the phone for nearly a half-hour as I proved to them that I really was me, mostly by providing info from the previous year’s return. (The agent did explain that it was because of all the ID theft & fraudulent refund claims. That, at least, I understood, but I’m retired and can spend my life on hold. What about real people with real lives?)
    Then I was told the refund would take an additional 6 weeks. That came and went. The refund finally arrived 2 weeks after that.

    And the IRS “where’s my refund?” only told me “still processing.”

    Glad I e-filed to speed up my return.

    • PatchEudor says:

      How did you you know the letter was from the IRS and not an identity thief? It seems that a lot of people will call any phone number on any legitimate looking mailing & then provide any information to the agent on the other end that they ask for. Did the mail point you towards an irs.gov website for confirmation?

    • RvLeshrac says:

      If you got the letter, either:

      a) Someone else filed a return using your social

      b) You screwed up the return

  12. Lyn Torden says:

    What they need is some kind of taxpayer identification number. Oh wait …

    • PHRoG says:

      The same tax identification numbers that identity thieves nationwide have been using for years. They just figured out a new way to abuse them using the new e-file system and a quick refund.

      • RvLeshrac says:

        It isn’t a “new” way to abuse them. Same old way. This is why the government *should* have made it illegal for anyone outside of the IRS and SSA to use SSNs.

  13. energynotsaved says:

    Due to an inheritance, I gave more than usual to charity. Because my percentage was high (and higher than normal for me), they are still holding my refund. I imagine I’ll get audited. Sigh. I could really use my money…

    I guess the moral is don’t give money to charity, or if you do, don’t take the deduction.

    • ahecht says:

      Or adjust your witholdings so that you aren’t owed a refund at the end of the year.

    • dush says:

      I thought there is no tax on estates less than $5 million. If you just received a windfall inheritance larger than that amount I’m surprised you need tax refund money.

      • IamJohnBrown says:

        Example: Inherited $40K, not a life-changing amount, but gave $5K to charity, and claimed it on the 1040, kicking the taxable income down to where there was a return of $2K instead of zero. Not hard.

        • dush says:

          If you’re in a financial situation where, even after receiving an inheritance, you need $2k refund money so badly then it probably wasn’t smart to give away $5k.
          Just keep the $5k, receive no refund and still have the extra $3k.

  14. dush says:

    If there were no income tax there would be no possibility of fraudulent income tax returns.

  15. SabreDC says:

    Or, as things get more and more electronic, why doesn’t the IRS compute the taxes and just send the bill or refund? Get rid of the whole self-reporting aspect altogether.

    • RvLeshrac says:

      Because there are a number of life events which aren’t reported to the IRS, or may not have been reported in a timely manner, which can dramatically alter your filing status. Such as marriage (where filing status is optional), or having a child born in the latter half of the year.

  16. bitplayer says:

    Look they take away efiling and you have a whole group of people who’ll loose their mind because they can’t handle not getting that cash. Also not all these returns are “id theft”. It’s common that people who cheat on their taxes and get their refund held know they are busted and then claim id theft.

    • RvLeshrac says:

      They’re ID theft because the IRS says they’re ID theft. They’re cases where two individuals filed with the same social.

  17. aweirdguy says:

    “Trying to stop fraudsters from getting money while also sending out payments to rightful filers is proving quite taxing for the agency”

    Ha. Proving quite taxing. Not worth a LOL but someone needed to groan out loud. Is GOL a thing yet?

  18. tanyaandkarl says:

    What is potentially fraudulent? Is that like a potential rapist?