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TIGTA spots 7 ways to deter fraud

by on
in Small Business Tax

A government watchdog is barking at the IRS for missing tax frauds relating to identity theft.

Alert: The IRS detected 938,664 tax returns totaling $6.5 billion in fraud for 2011. But a new report from the Treasury Inspector General for Tax Administration (TIGTA) suggests that it missed another 1.5 million tax returns with fraudulent tax refunds totaling more than $5.2 billion. (TIGTA 2012-36, 8/2/12)

TIGTA estimates the IRS could issue $21 billion in fraudulent tax refunds over the next five years. Accordingly, it has recommended that the IRS make the following changes in its procedures.

1.  Develop processes to use the National Di­­rec­­tory of New Hires (NDNH), a database containing information on all newly hired employees, to verify wage and other information. (Currently, the IRS is not permitted to access this information for this purpose.) The IRS should also use prior-year third-party income and withholding information to identify fraudulent returns.

2.  Develop processes to analyze characteristics of fraudulent tax returns resulting from identity theft and to refine the IRS’ existing tax processing filters. TIGTA used as an example its discovery that a large number of fraudulent tax returns came from the same address, noting that this was one method to flag suspicious returns.

3.  Work on obtaining legislation authorizing the IRS to obtain information from the NDNH at frequent and regular intervals.

4.  Develop a process to detect false Social Security benefit income and withholding claims at the time tax returns are processed, using Form SSA-1099 information received from the Social Security Administration. That information is received in December, and the IRS should be using information from those forms earlier in the year, before it issues refunds.

5.  Coordinate with responsible federal agencies and banks to develop a process to ensure that tax refunds issued by direct deposit are made only to an account in the taxpayer’s name.

6.  Limit the number of refunds that can be deposited to the same account. Direct deposit makes it easier to get a refund without having to negotiate a paper refund check. The IRS has resisted having only one refund permitted per account because it is concerned about situations in which an account is in the name of multiple individuals. TIGTA countered by presenting evidence that some accounts had incredibly large numbers of deposits that the IRS had not detected.

7.  Work with Treasury to ensure financial institutions and debit card administration companies authenticate the identity of individuals purchasing a debit card and prevent the direct deposit of tax refunds to debit cards issued or administered by financial institutions and debit card administration companies that do not take reasonable steps to authenticate identities.

Tip: The IRS has generally agreed to accommodate these recommendations.

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