The Internal Revenue Service doled out more than $5 billion in refunds on fraudulent tax returns filed by identity thieves last year, according to a federal audit.
The Treasury Inspector General for Tax Administration found that the IRS failed to identify 1.5 million fraudulent returns, sending out $5.2 billion in refunds. The agency called its estimate conservative noting that its analysis does not include instances where the IRS determined a return was fraudulent after a refund was issued.
The IRS reported that it identified nearly 939,000 fraudulent returns, stopping refunds of about $6.5 billion. But the Treasury General said the tax agency does not have a handle on the scope of the problem and estimates identify theft could cost taxpayers $21 billion over the next five years.
“While the amount of fraudulent tax refunds the IRS detects and prevents is substantial, it does not know how many identity thieves are filing fictitious tax returns and how much revenue is being lost due to the issuance of fraudulent tax refunds,” the report said. “Our analysis of the Tax Year (TY) 2010 tax returns processed during the 2011 Filing Season identified that tax fraud by individuals filing fictitious tax returns with false income and withholding is significantly larger than what the IRS detects and prevents.”
The audit notes several steps the IRS is taking to tackle identity theft.
- Designing new identity theft screening filters that the IRS indicates will improve its ability to identify false tax returns before the tax return is processed and prior to a fraudulent tax refund being issued. Tax returns identified via the new identity theft filters are being held during processing until the IRS can verify the taxpayer’s identity.
- Expanding efforts to place identity theft indicators on taxpayer accounts to track and manage identity theft incidents.
- Stepping up efforts to prevent the payment of fraudulent tax refunds claimed using deceased individuals’ names and Social Security numbers.
Read the full report below.
Hat tip CNNMoney.com.