The IRS could hand out some $21 billion in refunds to tax frauds over the next five years due to the growing problem of identity theft, a new federal report has found.
The Treasury Department’s inspector general for tax administration said the tax-collecting agency reported detecting $6.5 billion worth of fraudulent returns in 2011.
But according to the inspector general’s report, an additional $5.2 billion could also have been sent to tax cheats
And while Russell George, the inspector general, said that the IRS had beefed up its safeguards against identity theft, he added the agency still has multiple holes in its defenses.
“As identity theft is the most frequent consumer complaint, and at a time when every dollar counts, these results are extremely troubling," George said in a statement. "Undetected tax refund fraud results in significant unintended Federal outlays and has the potential to erode taxpayer confidence in our Nation's system of tax administration."
The IRS currently faces delays in when it receives certain third-party information about taxpayer income, and has not done enough to try to obtain the third-party data that is available when tax returns are filed.
The increased use of direct deposits for refunds is also a challenge for the agency, the report found.
The report’s findings come after the IRS dealt with more than twice as many identity theft incidents in 2011 than it did in 2010.
According to the report, the agency also issued more than $8 million, from potentially almost 5,000 fraudulent returns, to five separate addresses in Michigan, Illinois and Florida.
In its response, the IRS said that it had already addressed some of the issues the inspector general brought up in the 2012 filing season.
“Because of these actions, we believe that the report’s projection of undetected fraudulent returns over the next five years is significantly overstated,” the agency said.
Still, lawmakers on both sides of the aisle leapt at the report’s conclusions. Rep. Charles Boustany (R-La.), the chairman of a House Ways and Means subcommittee, said the study raised serious questions about how the IRS was deploying its resources.
“We’re learning that the IRS paid multiple refunds totaling nearly a million dollars to a single bank account – that is the kind of red flag that ought to draw more scrutiny,” Boustany said in a statement. “We need to know why the IRS is not catching this fraud.”
Sen. Bill Nelson (D-Fla.), who requested the study, has also released legislation with Sen. Tom Coburn (R-Okla.) to tackle the problem.
According to the inspector general report, Tampa and Miami have emerged as the top two cities from which potentially fraudulent returns were filed for the 2010 tax year.
“Online tax cheats are swindling billions from law-abiding Americans,” Nelson said in a statement. “It’s an ongoing problem; and, we’ve got to find a fix.”
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