- Days left

$4 Billion: Bogus Tax Refunds a Growing Problem

Tax Refund Fraud
Manuel Balce Ceneta/APAttorney General Eric Holder
By ERIC TUCKER

WASHINGTON -- An Internet connection and a bunch of stolen identities are all it takes for crooks to collect billions of dollars in bogus federal tax refunds. And the scam is proving too pervasive to stop.

A government report in November said the IRS issued $4 billion in fraudulent tax refunds over the previous year to criminals who were using other people's personal information. Attorney General Eric Holder said this week that the "scale, scope and execution of these fraud schemes" has grown substantially and the Justice Department in the past year has charged 880 people.

Who's involved? In a video message released ahead of the April 15 tax filing deadline, Holder said the scams "are carried out by a variety of actors, from greedy tax return preparers to identity brokers who profit from the sale of personal information to gangs and drug rings looking for easy access to cash."

Even Holder isn't immune. Two men pleaded guilty in Georgia last year to trying to get a tax refund by using his name, Social Security number and date of birth on tax forms.

The IRS says it opened nearly 1,500 criminal investigations related to identity theft in fiscal year 2013, a 66 percent increase over the previous year, and has strengthened filters that help detect where the scams are coming from. It says it stops far more fraudulent refunds than it pays out and is making a dent in the problem.

Still, the schemes have grown more sophisticated, attracting criminals with violent backgrounds who see an easy and safe vehicle for theft, according to law enforcement officials who fear that not enough controls are in place.

"I've been on calls with Alabama, Chicago, some other field divisions, where they're now experiencing people who were from Florida and now moving to other states to conduct this same type of fraud," said FBI Supervisory Special Agent Jay Bernardo, who works fraud cases in south Florida.

"Based on the parameters that are in place now," he added, "it's very difficult to stop."

What can taxpayers do? The most important step: Protect their Social Security numbers.

Thieves steal Social Security numbers in any number of ways, including from publicly available sources or workplaces. Victims include school children, prisoners, Medicaid beneficiaries and the deceased.
Criminals use the information to file false returns and then pocket the refund checks, often before the legitimate taxpayers have had a chance to submit their own returns. It's a crime made easier by electronic tax filing, which lets crooks mass-produce fraudulent returns.

"Part of what's happening is people are reverse engineering," IRS Commissioner John Koskinen told a House committee this week. "You know, you file a thousand fraudulent returns and then you see which ones go through. ... They can adjust faster than we can adjust."

In the latest sweep in south Florida, a hub for refund fraud, federal prosecutors last week announced charges against 25 people for using thousands of stolen identities to claim $36 million in fraudulent tax refunds. In one case, a middle school food services worker is accused of stealing students' personal information from an electronic database. In another, a jail guard is alleged to have stolen the identities of inmates and used the data to file false refunds. A mail carrier is accused of stealing tax documents out of people's mailboxes.

In Washington, a barber shop owner pleaded guilty last year to running a $20 million fraud scheme that sought tax returns on behalf of nursing home residents, prisoners and the dead. Some people sold their own personal information, while others turned it over after being led to believe they were entitled to "Obama Stimulus Money" or an income tax refund. A Cincinnati woman pleaded guilty in January to submitting false tax returns on behalf of legitimate, unwitting businesses, using her laptop computer in a public library.

A November Treasury Department inspector general report said fraudulent payouts over the previous year also went to addresses in Bulgaria, Lithuania and Ireland. In the U.S., more fraudulent refunds went to Miami than any other city.

Assistant Attorney General Kathyrn Keneally, who heads the Justice Department's Tax Division, said refund fraud remains a serious concern but that authorities are "turning a corner" in their understanding of the crime and their ability to track down and prosecute fraudsters.

"We're getting more and more sophisticated about how to catch it, how to stop it and how to prosecute it as we go on," she said.

In Miami, law enforcement officials say they've been encouraging people and companies to better protect their information and have been targeting those who buy and sell personal data before any false return can even be filed.

"That's the only thing we can do on our side, is just tell them be more cautious with your information," said FBI Assistant Special Agent in Charge Bill Maddalena.


Increase your money and finance knowledge from home

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

TurboTax Articles

What is IRS Form 8824: Like-Kind Exchange

Ordinarily, when you sell something for more than what you paid to get it, you have a capital gain; when you sell it for less than what you paid, you have a capital loss. Both can affect your taxes. But if you immediately buy a similar property to replace the one you sold, the tax code calls that a "like-kind exchange," and it lets you delay some or all of the tax effects. The Internal Revenue Service (IRS) uses Form 8824 for like-kind exchanges.

What are ABLE Accounts? Tax Benefits Explained

Achieving a Better Life Experience (ABLE) accounts allow the families of disabled young people to set aside money for their care in a way that earns special tax benefits. ABLE accounts work much like the so-called 529 accounts that families can use to save money for education; in fact, an ABLE account is really a special kind of 529.

What is IRS Form 8829: Expenses for Business Use of Your Home

One of the many benefits of working at home is that you can deduct legitimate expenses from your taxes. The downside is that since home office tax deductions are so easily abused, the Internal Revenue Service (IRS) tends to scrutinize them more closely than other parts of your tax return. However, if you are able to substantiate your home office deductions, you shouldn't be afraid to claim them. IRS Form 8829 helps you determine what you can and cannot claim.

What is IRS Form 8859: Carryforward of D.C. First-Time Homebuyer Credit

Form 8859 is a tax form that will never be used by the majority of taxpayers. However, if you live in the District of Columbia (D.C.), it could be the key to saving thousands of dollars on your taxes. While many first-time home purchasers in D.C. are entitled to a federal tax credit, Form 8859 calculates the amount of carry-forward credit you can use in future years, not the amount of your initial tax credit.

What is IRS Form 8379: Injured Spouse Allocation

The Internal Revenue Service (IRS) has the power to seize income tax refunds when a taxpayer owes certain debts, such as unpaid taxes or overdue child support. Sometimes, a married couple's joint tax refund will be seized because of a debt for which only one spouse is responsible. When that happens, the other spouse is said to be "injured" and can file Form 8379 to get at least some of the refund.