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Budget reductions impair IRS's ability to handle tax fraud spike

Some California taxpayers may have become unwitting victims of tax fraud during the past couple of years. The Internal Revenue Service is reporting that incidents of income tax fraud have jumped to the point that the agency is nearly hamstrung in its ability to respond to taxpayers who have questions about their returns.

One of the increasingly popular forms of fraud is Social Security number theft. According to the IRS, approximately 450,000 fraudulent returns in 2011 were attributable to identity theft. That figure represented nearly one-quarter of the 2 million income tax returns the IRS identified as fraudulent during that year alone.

Other causes included tax preparers who filed incorrect returns on behalf of their clients, people who were lured into falsely claiming attractive credits on their returns, and the use of prepaid debit cards to deliver refunds to taxpayers. The last item is part of a program that gives taxpayers the option to take their refund in debit card form instead of the traditional check from the Treasury. In some instances, these have been used to steal taxpayers' legitimate returns.

Electronic filing was also cited as a contributor. But like the debit card program, it offers benefits that the IRS is not willing to forego. In a report to Congress, the Taxpayer Advocate Service stated the IRS must implement measures that can more accurately distinguish between valid and fraudulent returns so that law-abiding taxpayers do not have to fight the IRS for months to clear their name and get the refund to which they are entitled.

But it is unclear at this stage how much the IRS can do. Beset by increases in fraud on one side and decreases in budget on the other, the TAS report revealed that during the busiest part of tax season, the IRS was only responding to one out of every nine calls from taxpayers who did not get their refunds. Taxpayers affected by tax fraud and those whose returns are under investigation can benefit from the services of a tax attorney who has years of experience dealing with the IRS.

Source: CNNMoney.com, "IRS struggles to keep up amid surge in tax fraud," Blake Ellis, June 28, 2012.

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