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IRS fails tax fraud victims, new report finds

IRS fails tax fraud victims, new report finds

Identity theft victims trying to get their tax refunds must navigate a Byzantine system of unreturned phone calls, conflicting regulations and unskilled Internal Revenue Service employees who give them incorrect information.

That’s the grim synopsis of a watchdog report issued Tuesday in Washington that said the process can take up to a year.

“The number of identity theft cases in the IRS has grown significantly over the last few years, overwhelming IRS resources and burdening taxpayers,” said the report issued by the Treasury Inspector General for Tax Administration. “Communications between the IRS and victims are limited and confusing.”

The release of the report coincided with yet another Congressional hearing on the issue.

Tax fraud has exploded since late 2010 in the Tampa area, where, authorities say, street criminals are using stolen personal information to file bogus federal tax returns so they can bilk taxpayers out of hundreds of millions of dollars a year.

Tampa was spotlighted yet again on Tuesday, when tax Inspector General J. Russell George told two House Ways and Means subcommittees how law enforcement confiscated thousands of preloaded debit cards during the investigation of an identity theft scheme.

In December, George said, a bank “associated with the confiscated debit cards from the Tampa scheme provided the IRS with a listing of 60,000 bank accounts, including debit card accounts, that it had identified nationwide with questionable tax refunds. The bank intercepted and prevented questionable tax refunds totaling $164 million from being deposited into these accounts.”

The inspector general’s report also noted that Florida has the highest per-capita rate of reported identity theft complaints, followed by Georgia and California.

But the fraud goes well beyond Florida. Nationwide, officials say, it’s costing the federal government billions of dollars a year.

“Obviously, it’s an extremely troubling and growing problem,” said Michael R. Phillips, deputy inspector general for audits, in an interview with The Tampa Tribune.

Phillips said his office has been examining the problem since 2005, and although the IRS has made some progress, there is much work to be done.

Phillips said the fraud has grown exponentially, along with the IRS’ ability to detect it.

Last year, he noted the IRS identified 940,000 questionable tax returns, stopping $6.5 billion in fraudulent refunds from being issued. But an inspector general audit identified an additional $5 billion in fraudulent refunds.

If the IRS doesn’t take additional action to address fraud, Phillips said, the inspector general estimates taxpayers will lose $26 billion more during the next five years.

The IRS is struggling to get a handle on the surging problem while also facing budget cuts, a hiring freeze and staff reductions, George told Congress. He said the agency estimates it would cost about $31.8 million to screen and verify about 1.5 million tax returns identified as not having supporting information. Not screening them could potentially cost the government $5.2 billion annually, he said.

National Taxpayer Advocate Nina E. Olson said the nation must weigh the need to stop fraud against the demand for quick processing of tax refunds without spending money to increase tax return screening.

“If we want to be absolutely certain that no improper refunds are paid out to identity thieves or other individuals with bogus tax returns, we could keep the April 15 filing deadline but push the date on which the IRS will issue refunds a few months into the summer,” she said. Or, she said, Congress could authorize “significantly more funding for the IRS so it could expeditiously work cases where returns and associated refunds have been flagged but may be legitimate.”

She said that while questionable returns have increased by 72 percent, the IRS staff that manually verifies returns grew by less than 9 percent.

“Absent one of these steps, honest taxpayers will continue to be harmed and overall taxpayer service and compliance will suffer as the IRS directs resources from other IRS activities to combat fraud and identity theft,” she said.

Olson said the United States must decide what it wants most from the tax system — quick tax refunds or fraud detection.

“Under current circumstances,” she said, “it is simply not possible for the IRS both to process legitimate returns rapidly and to combat identity theft effectively.”

The inspector general says giving the IRS access to wage and withholding information from employers in a timely manner would be an important tool in combating fraud. Currently, such information is not furnished to the IRS until the end of March, well after most taxpayers have filed their returns.

Phillips said lawmakers are considering addressing that problem by introducing legislation that would give the agency access to a national database of new hires, combined with withholding information from the previous year.

The inspector general’s report on the agency’s dealings with identity theft victims paints a daunting picture of what the victims face.

“Identity theft guidelines and procedures are dispersed among 38 different Internal Revenue Manual sections,” the report states. “These guidelines are inconsistent and conflicting, and not all functions have guidelines on handling identity theft issues.”

The IRS also fails to use the data it has from identity theft cases to detect trends that could be used to prevent future fraud, the report states.

Employees who are supposed to assist victims receive little or no training, the report states. And communications with victims are “inconsistent and confusing.”

Taxpayers, the report says, “are not provided realistic time frames for how long it will take to resolve their cases.” When they are given time estimates, they are usually told 90 days, “which has not been realistic.”

IRS employees told the inspector general’s staff that they were frustrated “with the time frames they are to use when advising taxpayers on how long it will take to resolve their case.”

The inspector general reviewed a sample of 17 identity theft cases, finding the average resolution time was 414 days, with the longest case taking 916 days to resolve — nearly three years.

The 17 taxpayers had 58 different cases opened and multiple IRS employees working on them.

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