Aug. 8 (Bloomberg) -- The Internal Revenue Service’s approach to issuing tax identification numbers to non-U.S. residents let fraud go undetected, according to a report by the agency’s inspector general.
The IRS emphasized getting applications processed while creating an environment that discouraged employees from stopping potentially fraudulent applications, the report said today. It said 15,795 numbers were assigned to a single address in Phoenix, and $52.5 million in tax refunds associated with nonresidents’ numbers were sent in 2011 to just four addresses in Atlanta.
“It is to be hoped that significant, systematic change, rather than interim improvements, will take place,” Russell George, the Treasury Department’s inspector general for tax administration, said in a statement.
The audit emphasized the amount of money at stake. In 2011, the IRS processed more than 2.9 million tax returns with the numbers and sent $6.8 billion in tax refunds, according to the report. It didn’t have an estimate of how much of that amount involved potentially fraudulent claims.
The IRS gives individual taxpayer identification numbers to tax filers who aren’t entitled to get Social Security numbers. The IRS doesn’t consider applicants’ immigration status, and even nonresidents who aren’t authorized to work in the U.S. can have tax filing obligations and pay taxes.
Individuals who have the numbers are able to claim certain refundable tax credits or file false tax returns to claim refunds.
The agency is starting a comprehensive review of the program and has “significantly increased our scrutiny” of applications for the numbers and obtained “new tools and equipment” to detect fraudulent documents, Michelle Eldridge, an IRS spokeswoman, said in a statement.
“Our leadership moved quickly and aggressively to address issues that were identified,” she said.
Representative Charles Boustany, the chairman of the Ways and Means Committee’s oversight panel, wrote to IRS Commissioner Douglas Shulman today to ask for more details on the agency’s decisions to disband a fraud detection team, change the tracking of suspect filings and continue a program that lets third parties verify information of applicants for the numbers.
“The report contains startling examples of IRS management ending practices and procedures that guard against tax fraud and actually discouraging IRS employees from flagging potential fraud,” wrote Boustany, a Louisiana Republican.
Representative Sam Johnson, a Texas Republican, said in a statement that Shulman should resign. The report shows IRS officials “are essentially aiding and abetting illegal immigrants and others in fraudulently receiving tax refunds,” Johnson said.
The IRS announced in June that applicants for the numbers will be required to submit original identification documents instead of notarized copies.
“We are in the process of reinforcing to our employees and managers the critical importance of the integrity of this program to ensure that our recent improvements to the program are sustained,” Peggy Bogadi, commissioner of the agency’s wage and investment division, wrote in the IRS response to the report.
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