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Tax refund fraud: how will IRS filters affect innocent taxpayers?

Many people like to file their taxpayers early. The motivation may be to get a tax refund sooner. It may be simply be to get taxes taken care. It could be both.

Unfortunately, many tax fraud and identity theft schemes target early filers. The IRS says it is aware of the problem and tying to put in place procedures to detect or avoid possible fraud without unduly burdening innocent taxpayers with excessively long waits for their refunds. These filers include increased scrutiny for automatic deposits of refunds and multiple returns at the same address.

The U.S. Government Accountability Office (GAO) has released a report that quantified the number of identity theft incidents involving tax fraud. In the last fiscal year, the number was 641,690. That was an increase of 62 percent from the year before.

Late last week, an IRS official testified before Congress about new filters the agency is using in its effort to catch tax fraud. Beth Tucker, the IRS deputy commission for operations support, told a House committee that the agency would try to inconvenience ordinary taxpayers as little as possible while streamlining its procedures for catching and resolving tax fraud cases involving identity theft.

A common pattern is for thieves to obtain the name and Social Security number of a taxpayer in order to file a fraudulent returning seeking a refund. The would-be thieves get this information through computer hacking or stealing files from organizations that keep such information in their records. Once they obtain a name and SSN, the thieves typically file an early tax return, seeking a refund before the real taxpayer does so.

Considering the scope of the problem, the IRS knows more effective action is needed to confront this type of tax fraud. This does not necessarily mean that the agency should delay sending out any tax refunds until it has reviewed all of that year's tax returns. Nina Olson, the national taxpayer advocate, has proposed this solution. But it would obviously hold up refunds for many innocent taxpayers.

The GAO also has recommendations for how the IRS can better address the problem. The IRS should not only use filers to detect identity theft. It should also dig deeper to determine why some tax fraud cases make it past those filers.

Source: "Alarming Rise in IRS Refund ID Thefts, Few Prosecuted: GAP Report," ABC News, 12-3-12

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our California tax fraud page.

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