IRS Fraud: The Whopping $21 Billion Fraud on the IRS

In 2014, the IRS was subject of a $6.5 Billion fraud. Some reports say it was bigger. What is this IRS fraud? It’s called tax refund fraud and it’s quite simple really. Fraudsters obtain large lists of taxpayers’ names and social security numbers (from where, who knows? the dark web?). Then they electronically file false tax returns with the IRS claiming tax refunds. The problem has become so big for the IRS, and lucrative for criminals, that the fraud is expected to reach a whopping $21 Billion in 2016.

I can tell you from personal experience as a tax attorney that the fraud is very difficult to detect and prove. Aside from a list of identities, a criminal needs little more than a laptop and internet connection to perpetrate the fraud. In more than one case I’ve recently been involved with, the fraudsters have even stolen a legitimate preparer’s identity to process fake refunds.

Perhaps you’re thinking, can’t they track the tax refund checks? Well, yes and no. Imagine that a stolen identity (i.e. someone’s real identity) is used to establish a bank account. Additionally, fraudsters use third party refund companies that offer “refund advances.” Refund advance companies have the ability to issue rapid refunds in the form of pre-paid debit cards.

The IRS has recently issued a statement advising that hackers had stolen more than 700,000 identities from an online tool known as “Get IRS Transcript,” which allowed taxpayers to log in and obtain a copy of their IRS records. Nevertheless, this transcript contained enough information for thieves to file fraudulent returns. Just yesterday (3/26/2016), the IRS announced that it now believes more than 1 Million accounts may have been stolen.

The IRS has taken a significant number of measures to protect the public. Its wage and income division reported it prevented $63 Billion of false refunds from being paid. While admirable, this number demonstrates how pervasive the problem is.

The IRS offers a person who has been subject to identity theft the ability to file an identity theft affidavit, and the IRS will “place a marker on your account to assist with future protection.” The IRS had offered an Identity Theft Protection Pin as a limited pilot program in 2015 and 2016 for residents of Florida, Georgia, and Washington, D.C., whose residents had the highest per capita tax related identity theft. Residents of those states could apply for a unique PIN number issued anually to prevent unauthorized returns from being filed. However, as of March 7, 2016, the IRS suspended the IP PIN online tool because it “is looking at further strengthening the security features on the tool.”

As of January 1, 2012, tax return preparers were required to use IRS e-file, eliminating paper tax returns. Henceforth, the problem has amplified into a hacker’s dream and a $21 Billion IRS problem. As of the writing of this post, the IRS reported a 400% surge in phishing and malware incidents so far this tax season. Finally, threatening phone calls by criminals impersonating IRS agents remain an ongoing threat. The IRS has seen a surge of these phone scams in recent years as scam artists threaten taxpayers with police arrest, deportation, license revocation and more. These con artists often demand payment of back taxes on a prepaid debit card or by immediate wire transfer.

In conclusion, the three biggest problems facing the IRS and taxpayers are (1) identity theft (false tax refunds) (2) email phishing/malware and (3) threatening phone calls, all fraud. I can report from my own experience, at times it seems more than 50% of my clients’ IRS accounts are compromised without them knowing it. Furthermore, I have received several calls from very worried clients and prospective clients who believe the IRS is on the other line claiming they’ve committed tax fraud–and it can be remedied through a quick credit card payment.

If you need so,e assistance in this area, please feel free to call me (786) 464-0403 or visit www.irs.gov/identitytheft for more information.