A Call for Action On Tax Scams

By Stephen Barr
Monday, April 14, 2008

The scam goes like this:

A bogus tax return using a stolen Social Security number is submitted to the Internal Revenue Service early in the tax-filing season. Because the IRS does not know the return involved identity theft, it sends a refund.

When the real tax return is filed, it gets flagged as a duplicate, freezing any refund. It sometimes takes months for the innocent, legitimate taxpayer to sort it all out with the IRS.

Filings of fictitious tax returns to steal refunds have jumped dramatically, perhaps because con artists can file them electronically and get a direct-deposit refund long before the real taxpayer finds out.

From 2002 to 2007, the number of fraudulent tax return complaints to the Federal Trade Commission jumped to 20,782, from 3,061, according to a report by the Treasury Inspector General for Tax Administration, or TIGTA.

The rise in fraudulent tax returns was an issue at a Senate Finance Committee hearing last week called by the committee chairman, Sen. Max Baucus (D-Mont.). "I am disappointed that the IRS does not notify a taxpayer when someone else has filed a return using the victim's Social Security number," he said.

Nina E. Olson, the national taxpayer advocate, who provides an independent voice on behalf of taxpayers, told the committee she is concerned the IRS does not know how many taxpayers are affected by identity theft and said the problem may be more widespread than IRS data suggest.

Another witness, J. Russell George, the inspector general for tax administration, said the IRS "processes and procedures have been inadequate in reducing the burden for taxpayers who have been victimized. When the IRS becomes aware of employment-related identity theft, it does not take action unless the case relates to a substantive tax or conspiracy violation."

Unless the IRS acts to address identity theft and related computer security issues, George said, "there is no deterrent to keep the problem from spreading."

Olson, in additional testimony submitted to the committee, said her staff is receiving calls from senior citizens who filed for this year's tax rebate after not filing returns for several years and who have discovered that someone else has been using their Social Security numbers on tax returns.

She and George also described another common scam involving tax returns.

These cases often involve illegal immigrants and undocumented workers who use another person's identity -- name, Social Security number or both -- to obtain employment. The employer files a wage and tax statement, the W-2, under the stolen identification information, and the IRS computers attribute the earnings according to the Social Security number. Then the IRS levies an additional tax on the lawful owner of the Social Security number, creating consequences for the innocent person.

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