Thursday, March 06, 2014
AMHERST — The good news, according to the Internal Revenue Service, is that its crack teams of forensic accountants prevented the payments of $1.5 billion in fraudulent tax refund checks last year.
The bad news, however, is that the Treasury Department estimates the IRS will pay more than $21 billion in fraudulent tax refunds over the next five years.
There are many ways income tax identity theft is carried out, but they all involve obtaining the Social Security number and name of someone and filing a phony income tax return in the victim’s name, generally with a counterfeit W-2 form before the legitimate taxpayer files his or her income tax return. When the victim eventually files his or her income tax return, the IRS becomes aware of the problem due to the double filing — although by that time a substantial refund has already, in many instances, been paid out to the identity thief.
Compounding the identity theft victim’s problem is that it can take months before he or she is able to receive a tax refund.
Social Security numbers of children and the elderly who may not have sufficient taxable income required to file a federal income tax return are particularly valuable to identity thieves because there won’t be a legitimate income tax return filed to alert the IRS to the problem.
Social Security numbers for citizens of Puerto Rico are also highly prized by identity thieves because citizens of Puerto Rico are required to have Social Security numbers, but are not required to file a federal income tax return if their income is derived from Puerto Rico. Even dead people are common victims of income tax identity theft, as their names and Social Security numbers are still readily available to anyone through the federal government’s Death Master File, although legislation was passed in December to stop making this file available to the public.
Although the IRS is quick to trumpet the strides it is making in combating income tax identity theft, the Treasury inspector general for tax administration found that the IRS didn’t manage to find anything unusual when it issued a million dollars in refund checks for 741 separate income tax returns that all had the same Belle Glade, Fla., address.
Nor did the IRS pick up that something might be amiss when it sent refund checks of more than $3.3 million related to 2,137 individual income tax returns to the same Lansing, Mich., address.
The IRS is starting to employ new software programs developed by IBM and LexisNexis that use publicly available information to cross reference the information in income tax returns to see if they match available data.
However, there is a simpler solution that the agency has not implemented that would be dramatically effective in reducing income tax identity theft.
This year, employers were required by law to file W-2s with the Social Security Administration by the end of February if they are filing paper forms and March 31 if they are filing electronically. Employers are not required to submit W-2s to the IRS at any time.
Instead, the Social Security Administration sends copies of the W-2s to the IRS in July and then in August the IRS gets around to matching them with the W-2s filed with income tax returns, long after the IRS has already sent out its income tax refunds based on those W-2s.
One might ask, as the Treasury Department has done, why the IRS does not match W-2s before sending out refunds.
One might ask, but one will not get a good answer.
Steven J.J. Weisman of Amherst is an attorney, professor at Bentley University and nationally recognized expert in identity theft and scams. He writes the blog www.scamicide.com and books about identity theft, including “50 Ways to Protect Your Identity in a Digital Age.”