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.