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]