The IRS Pays Out Billions Each Year in Fraudulent Tax Refunds

The IRS continues to complain they have a lack of funds and staffing and ever-increasing responsibilities. Yet every year they waste billions of dollars by sending out bogus tax refunds, many of which were loaded with red flags.

The Business of Fraudulent Tax Refunds

Filing fraudulent tax returns has become big business. Why risk shoplifting at Walmart for a few bucks, when from the comfort of your home, you can get the government to mail thousands of dollars to your doorstep? Many of the fake tax returns include stolen Social Security numbers, are filed by what auditors call “unauthorized immigrant workers,” or prison inmates or people outside the country with with no U.S. income. It all adds up to massive fraudulent refunds which should never have should have been paid. But they were… apparently without so much as the raise of an IRS eyebrow.

Part of the problem is electronic filing, which makes it all too easy, fast, and anonymous. The IRS also attributes some of the blame to the complexity of the tax code. We can all agree with that one. While the IRS didn’t seem to notice all those bogus refunds going out, another agency did notice… after the fact.

The Treasury Inspector General for Tax Administration (TIGTA) serves as a public watchdog, and has taken the IRS to the woodshed, again and again for a long list of failures. According to a report in July of 2012 TIGTA says the IRS paid fraudulent refunds amounting to $3.6 billion in 2011. That’s bad. But it’s actually a great improvement from the year before when they gave away $5.2 billion.

TIGTA, Not the IRS, Catches Errors

The majority of taxpayers perceive the IRS as catching every tiny error of any kind, made by those of us who are not thieves. So it’s hard to believe blatant fraud gets rewarded with undeserved refund checks, but it’s true.

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Here’s an excerpt from the TIGTA report.

“We identified more than 141,000 tax year 2011 tax returns filed with ITINs [individual tax identification numbers] that have the same characteristics as IRS-confirmed identity theft tax returns involving an ITIN. Potentially fraudulent tax refunds issued for these undetected tax returns totaled approximately $385 million.”

The report also showed:

  • Though multiple refunds were sent to the same bank account, the IRS either failed to notice, or failed to take action.
  • Tens of millions of dollars were paid in fraudulent refunds filed to “unauthorized immigrant workers.”
  • Most startling is, of those bogus refunds, 23,944 were mailed to one single address in Atlanta, Georgia. Those refunds totaled $46,378,040.
  • While Atlanta was the worst geographic location for this type of fraud, there were many runner-up cities, mostly in California, North Carolina, Arizona, and Florida, where thousands of fake returns resulted in millions of dollars in bogus refunds paid to single addresses.

Positive Effects

It’s true the amount of bogus refunds in the last available TIGTA report is staggering, at $3.6 billion. But it does show a significant improvement from the previous year’s total of $5.2 billion. This could mean that scrutiny from TIGTA and from the public is having a positive effect on the inner-workings of the IRS. Combined with a relentless flow of bad news throughout 2013, this scrutiny has brought pressure to bear on the tax agency, which, we hope will keep the fraud statistics moving in the right direction.

Teresa Ambord is a staff writer for SuperMoney. Her mission is to help fight your evil debt blob and get your personal finances in tip top shape.