IRS, Personal Taxes

TIGTA: THERE ARE BILLIONS OF DOLLARS IN UNDETECTED TAX REFUND FRAUD RESULTING FROM IDENTITY THEFT

I was asked to consult on an awful tax fraud case a couple of weeks ago.  A married couple moved to California recently.   We will call the couple Bob and Jane.  They moved to the west from Illinois, where a paid tax return preparer prepared their tax return for several years.  We’ll call the tax return preparer Dirty-Rotten-No-Good-Scoundrel, or Scoundrel for short.  Recently, their 2008 Federal income tax return was audited.  The IRS says that the Bob and Jane owe money.  Here’s what happened.

As the IRS encourages people to do, Bob and Jane filed their joint return electronically and requested their refund to be deposited directly into their bank account.  They gave Scoundrel the banking information, and he placed it on the return.  He sent Bob and Jane a copy of the return to approve and keep for their records.  The return reflected a $5,000 refund.  They approved the return and Scoundrel filed it electronically.

However, before Scoundrel filed the return, he changed the return to reflect a $12,000 refund and changed the direct deposit information to cause the refund to be deposited into his own account.  Then, when Scoundrel received the money, he wired $5,000 into Bob and Jane’s bank account.  He pocketed the difference.

Upon audit, the IRS says that Bob and Jane owe the IRS $7,000 for that year.  Taking into account other years’ tax returns where Scoundrel cheated the couple, the IRS says Bob and Jane owe $40,000 of tax, interest and penalties.

Bob and Jane were completely shocked.  “We didn’t get $12,000 from you that year.  In fact we didn’t get anything from you.  You sent the money to Scoundrel.  You were defrauded by Scoundrel.”

IRS:  “Sorry, not our problem.  Give us $7,000.  No, make that $40,000.”

Scoundrel, who’s long gone now, probably defrauded dozens, if not hundreds, of people and the IRS.  Scoundrel is not the only fraudster out there.

In a report released August 2, 2012, the Treasury Inspector General for Tax Administration “TIGTA” suggested that the IRS missed 1.54 million tax returns with potential identity-theft-related fraudulent tax refunds in excess of $5.2 billion for the 2011 processing season.  TIGTA says that this is a conservative estimate.  The IRS itself reported that it detected 938,664 returns involving identify theft and prevented the issuance of fraudulent tax refunds totaling $6.5 billion in the same period.

TIGTA pointed out a number of deficiencies in the tax refund process and identified the direct deposit feature as having substantial weaknesses.  In fact, eighty-two percent of the potentially fraudulent tax returns TIGTA identified had approximately $4.5 billion in tax refunds received via direct deposit.

TIGTA offered eight recommendations for improvement (one of which was completely redacted in the published report).  Among them, the IRS should develop a real-time method of identifying multiple refunds going to the same bank account.  For 2010 returns, TIGTA identified a bank account that received from the IRS 590 direct deposits totaling $909,267.  It identified other accounts with very high volumes of refund receipts.

Also, TIGTA said that the IRS needs to develop a system to detect early when many potentially fraudulent returns are being filed from the same address.  For example, TIGTA identified an address in Lansing, Michigan from which 2,137 returns for 2010 were filed, for which $3,316,051 in refunds were issued.

I hope the IRS can find ways to get many more of the bad guys.  In the meantime, I hope it gives Bob and Jane a break.   They did nothing wrong.

Vance

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Come Out, Come Out, Where Ever You Are: The New Rule on Fee Disclosures to Participants in Employee Benefit Plans that Every Plan Sponsor should Know

[I am pleased to post this very informative blog written by Crystal Smith, manager in our attestation practice. She is a skilled auditor and a fine writer, as you can read for yourself. Thank you, Crystal.  -Vance]

Since April 2007, the Employee Benefits Security Administration (EBSA) has been soliciting comments and suggestions from the general public regarding their thoughts on employee benefit plan fee disclosure.  After almost five years of reviewing comments, the final ruling is here. Participants will no longer be engulfed in the never-ending game of hide and seek when it comes to identifying expenses and fees charged to their retirement accounts.

In February 2012, the EBSA ruled that the fiduciary responsibility includes the investment of plan assets which is governed by Section 404(a)(1)(A) and (B) which requires a fiduciary to act “prudently and solely in the interest of the plan’s participants and beneficiaries.”  The rule also states that the plan administrator must ensure that participants or beneficiaries are advised of their rights and responsibilities in regards to their investment options and activity in their account including but not limited to contributions, fees and expenses.  The plan administrator must also provide certain plan and investment related information to each participant or beneficiary.  So now you’re thinking, ‘Whew. That was close. Glad, I’m not the plan administrator.  I pay XYZ Company to do that for me.’  Not so fast—While a plan sponsor may outsource the plan’s administration, the plan sponsor remains the responsible party and maintains the fiduciary responsibility.

So now that you know that you can’t outsource your fiduciary duty along with the administration of your plan, what information should your service provider disclose to participants in your plan?

Plan Related Information

Plan related information consists of three categories:  General plan information, administrative expense information and individual expense information.

  • General information includes information about the structure of the plan as well as the investment options and any brokerage windows.
  • Administrative expense information includes an explanation of fees and expenses for general administrative services that may be charged to participant accounts such as accounting, legal or recordkeeping fees.
  • Individual expense information includes information related to the respective participant’s account such as fees charged for loan and distribution processing.

Investment Related Information

Investment related information includes five categories: performance data, benchmark information, fee and expense information, internet web site address and glossary.

  • Performance data – The historical investment performance such as 1, 5 and 10 year returns for investment options that do not have a fixed rate of return should be disclosed; investments with a fixed rate of return must disclose the annual rate of return and the term of the investment.
  • Benchmark information – If investments do not have a fixed rate of return, the name and returns of an appropriate broad–based securities market index over 1, 5 and 10 year periods must be provided.  If an investment has a fixed rate of return, this requirement does not apply.
  • Fee and expense information  – If the investment does not have a fixed rate of return, the total annual operating expenses expressed as a percentage of assets and a dollar amount for each $1,000 invested as well as any shareholder type fees or restrictions that may restrict the participant’s ability to purchase or sell the investment must be disclosed.
  • Internet web site address – A web site address that gives participants and beneficiaries access to additional information should be made available.
  • Glossary – A general glossary should be provided to assist participants and beneficiaries in understanding the plan’s investment options or an internet web site that provides access to such information.

Compliance Deadlines

This information is required to be comparative and was effective July 1, 2012.   Annual disclosure of plan level and investment level information must be furnished to participants no later than August 30, 2012 for calendar year plans.  The first quarterly statement must be furnished to participants no later than November 14, 2012 for information July through September (45 days after the end of the third quarter July – September).  In addition, participants must receive statements at least quarterly showing plan and individual fees charged to their accounts with a description of the fees.

Non-compliance:

Plan sponsors are protected from liability related to the completeness and accuracy of the information provided to participants if the plan sponsor reasonably and in good faith relies on the service provider to whom the plan administration is outsourced.

More information:

For more information, please visit www.dol.gov.

Disclaimer:

All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.