IRS May Lose $21 Billion in Identity Fraud, Study Says

Identity thieves are poised to claim $21 billion in fraudulent tax refunds over the next five years, according to a report by the inspector general who oversees the U.S. Internal Revenue Service.

The report released today documents the growth in tax fraud through identity theft and includes previously unreleased details of potentially fraudulent returns.

For example, the IRS sent more than $3.3 million in refunds to an address in Lansing, Michigan, that was listed on 2,137 separate tax returns. In at least 10 cases, the IRS sent more than 300 direct deposits of refunds totaling more than $470,000 to the same bank account.

“At a time when every dollar counts, these results are extremely troubling,” said J. Russell George, the treasury inspector general for tax administration, in a statement. “Undetected tax refund fraud results in significant unintended federal outlays and has the potential to erode taxpayer confidence in our nation’s system of tax administration.”

The IRS has been seeking to combat identity theft for several years as it tries to keep up with evolving schemes while avoiding delays in legitimate refunds.

The IRS disputed the $21 billion estimate. In a statement, it said the amount is “significantly overstated” because of changes made in detecting identity theft. The report mostly covers the 2011 tax filing season and relies on data that wasn’t necessarily available to the IRS at the time, wrote Peggy Bogadi, commissioner of the IRS wage and investment division.

‘Significant Resources’

“We are devoting significant resources to combat tax refund fraud using stolen identities and have already taken action with respect to issues identified in the report,” she wrote.

In a statement released today, the agency said it has changed its screening filters to address the issues raised in the report.

“To date for this year, almost $12 billion in confirmed refund fraud has been stopped, and at least half of this is confirmed identity theft,” according to the statement. “The amount stopped will continue to grow, and the IRS is on pace to significantly exceed the amount of confirmed refund fraud prevented compared with prior years.”

Agency Priority

The inspector general’s report said the IRS has taken several steps to address tax-related identity theft fraud. The issue has become an agency priority, the report said, and the IRS has improved in identifying fraud patterns.

The identity theft fraud has been concentrated in Florida, said the report, which found more than $468 million in potential fraud in Tampa and $280 million in Miami.

The report recommended that the IRS should use existing federal databases to flag potential fraud. It said Congress would have to grant the agency authority for this.

The report said the IRS should limit the number of tax refunds that can be sent to a single bank account and deposit refunds only to bank accounts and debit cards in the taxpayer’s name.

“Online tax cheats are swindling billions from law-abiding Americans,” said Senator Bill Nelson, a Florida Democrat who requested the report, in a statement. “It’s an ongoing problem, and we’ve got to find a fix.”