Feb. 17, 2012 at 7:21 AM ET
The Internal Revenue Service is grappling with a surge in identity theft-based tax fraud as crooks take advantage of web-based resources including electronic filing.
Identity theft cases, in which criminals obtain living or deceased people’s names and Social Security numbers to defraud the government, ranked No. 1 on an annual “Dirty Dozen” list of tax scams the agency released Thursday. The IRS called ID theft one of the most complex threats it handles.
The IRS estimates 404,000 people were victimized by identity theft tax fraud from mid-2009 to the end of 2011.
“We are seeing growth in this area. There’s no way around it,” said Terry Lemons, IRS director of communications. “But I also think that we’ve gotten better at detecting it.”
The IRS said it stopped nearly 262,000 fake returns based on identity theft from being processed in 2011, preventing nearly $1.5 billion in refunds from going to criminals. That is more than a fivefold increase from 2010, when the agency stopped about 49,000 fake returns seeking $247 million in fraudulent refunds.
The IRS said it has no way of knowing how much in fraudulent refunds made it through the system undetected.
Experts say this type of fraud has increased thanks in part to the Internet. The Web has made it easier for honest people to file their tax returns -- and for crooks to file fake returns electronically. The IRS has been on a major push to encourage people to file electronically.
“That was probably one of the biggest boons for the bad guys,” said Jay Foley, a partner with ID Theft Info Source and an identity theft expert.
With more than 100 million income tax refunds to process each year, the IRS concedes it will never be able to quell such tax fraud completely.
“The IRS cannot stop all identity theft. However, we are committed to continuing to improve our programs,” Steven T. Miller, the deputy commissioner for services and enforcement at the IRS, said in written congressional testimony in November.
The agency has added new filters to screen for potential identity theft tax fraud and is working harder to help victims get their rightful refunds.
In late January, the IRS and Justice Department announced a nationwide sweep of arrests, indictments and other actions against 105 suspected perpetrators of the crime in 23 states.
In its testimony to Congress, the IRS said it had initiated 276 investigations into identify theft tax fraud in fiscal 2011, up from 224 the previous year.
The IRS is under tremendous pressure to get taxpayers their refunds as quickly as possible while also accurately screening for fakes. That’s complex because people's lives are complicated. Many of the things that might flag a return as fraudulent -- such as a change in job, mailing address or name -- are legitimate.
The new IRS filters mean that more people’s tax refunds will get extra screening before they go out, Lemons said.
“I think for the vast majority of taxpayers, they’re not going to see any difference,” he said. “There will be some people who end up having some delays.”
ID theft tax fraud tends to occur early in the tax season as criminals try to file before legitimate taxpayers. (For tips on how to prevent and identify identity-based tax fraud, check the guide posted on the IRS website.)
Despite the agency's efforts, Foley, the identity theft expert, expects the problem to get worse before it gets better. That’s because criminals keep finding new ways to evade IRS systems.
Still, he thinks the IRS is doing the best it can given its limitations. People want their legitimate tax refunds as fast as possible, but if the IRS doesn’t catch the fraud before the refund goes out, the agency may not even realize fraud has occurred until long after, when the real taxpayer goes to file a return.
“You can’t fix something until you know something is broke,” he said.
The crime appears to have surged in popularity rapidly.
In Florida, NBC television affiliate WFLA and The Tampa Tribune reported identity theft tax fraud had became so widespread that some people were offering classes in how to commit the crime.
The station's investigation said the criminals dubbed the process “TurboTax” after the popular online software for filing returns.
Julie Miller, a spokeswoman for TurboTax’s parent company, Intuit, said in an email that the company had amped up its own fraud prevention efforts over the past year. She declined to give details for fear of tipping off criminals.
In many cases, the fraud begins when a criminal steals someone's name and Social Security number, and then uses them as a basis to create fake a return that ensures a hefty refund. The refund is sent to an address specified by the fraudster.
Another method involves getting the names, addresses and Social Security numbers of recently deceased people from websites such as Ancestry.com, which are meant to help people find their long-lost relatives.
A spokeswoman for Ancestry.com, Heather Erickson, said the company didn’t notice anything unusual. But around December, after being alerted to the problem, the website stopped showing Social Security numbers for anyone who had died in the past 10 years.
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