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In the past few months, we have talked a few times about the rise in taxpayer identity theft that has been behind a growing wave of tax fraud across the country. While nearly everyone has acknowledged that this is a grave problem, a recently released report from the Treasury Inspector General for Tax Administration says that it could be much worse than people had first thought.

While average taxpayers in California and around the country can be the victims of identity theft, the TIGTA report indicates that identity thieves seek targets that make them more likely to evade detection. For example, they will seek refunds using the identities of people who do not file returns because their income is too low. In addition, taking the Social Security numbers of deceased taxpayers is a popular tax fraud strategy.

The Internal Revenue Service has been trying to adapt to these methods and it has had some success in stopping fraudulent returns. According to the report, it prevented about $6.5 billion in fraudulent refunds by detecting approximately 1 million false returns in 2011 alone. But the IRS failed to catch them all. An estimated $5.2 billion may have been paid out to satisfy the false refunds requested by 1.5 million tax returns.

The report recommended some solutions to the problem, including giving the IRS greater access to federal information, but some of these changes would need legislative approval. At times, those who unknowingly have false returns filed using their identity can unwittingly become involved in an IRS controversy. In some cases, it may take an experienced tax attorney to clear their names with the government.

Source: The Wall Street Journal, “Report: Billions in Additional ID Tax Fraud,” John D. McKinnon, Aug. 2, 2012.

• The IRS can impose heavy penalties against those it suspects of tax fraud. If you would like more information on my firm, please visit my Irvine tax evasion page.