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A downside of e-filing: data fields ripe for tax audits

The problem of tax-return fraud involving identity theft is so large that there are many different aspects to it. Last week, we wrote about the issue of how the IRS is responding to the challenge of processing returns without undue delays.

In today's post, we'll look more closely at the role of e-filing in enabling tax-return fraud to occur. The problem is remarkably widespread and is reflected in the number of cases. The number has gone from 51,700 in 2008 to more than 1.1 million in 2011.

In a sense, the scale of the problem is a downside of tax return mechanisms that in other ways have worked rather well. The IRS has encouraged taxpayers to file electronically. And that effort has succeeded to a significant degree. Last year, 80 percent of individual tax returns were submitted by e-filing.

Of course, Americans haven't chosen this form of filing just because the IRS urged them to. E-filing is not only convenient; the electronic postmark it provides is also a good practical confirmation that a return was filed in a timely manner.

Along with e-filing has come a reliance on automated deposits for tax refunds. Again, in some ways this has worked well, as taxpayers no longer have to wait so long for paper checks.

But there are also some serious downsides to e-filing. One of those is the unintended way it has allowed identity theft schemes to victimize so many taxpayers.

The prevalence of e-filing has also tended to make tax forms more complex and made it easier for the IRS to target taxpayers for audits. The more data the IRS demands, the more likely it becomes that a computerized audit will find some sort of discrepancy.

Electronic returns get put into an e-file database that the IRS acknowledges is fertile ground for audits.

Source: "E-Filing and the Explosion in Tax-Return Fraud," The Wall Street Journal, Jay Starkman, 1-13-13

Our firm handles situations similar to those discussed in this post in California. To learn more about our practice, please visit our IRS audits and appeals page.

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