Audit: IRS Could Issue Up to $2.3 Billion in Fraudulent Tax Refunds Each Year

Fraud Could Cost $11.4 Billion Over Next 5 Years

The U.S. Treasury building / AP
December 5, 2013

The IRS could issue nearly $2.3 billion in fraudulent tax returns to individuals who forge tax identification numbers each year, according to the Treasury Inspector General for Tax Administration (TIGTA).

An audit released on Thursday found that the tax agency routinely issues refunds to business accounts with fabricated Employer Identification Numbers (EINs).

"Perpetrators of fraud are using stolen or falsely obtained EINs to submit tax returns with false income and withholding documents to the IRS for the sole purpose of receiving a fraudulent tax refund," TIGTA said.

The audit identified 285,670 stolen or falsely obtained EINs that were used for 767,071 tax returns in 2011. As a result, a total of $2,273,177,371 in potentially fraudulent refunds were dispensed that year.

"Based on our analysis we estimate that the IRS could issue approximately $11.4 billion in fraudulent refunds over the next five years because of stolen and falsely obtained EINs," TIGTA said.

The IRS does maintain a list of "suspicious EINs," which includes 6,333 fake identification numbers that have been used since 2003.  Based on its list, the IRS prevented $35.1 million in fraudulent refunds in 2012.

TIGTA said the agency’s efforts are not enough to make a substantial impact against fraud.

"The IRS has developed a number of processes to prevent fraudulent refunds claimed using stolen and falsely obtained EINs," the audit said. "However, the IRS does not have the third-party Form W-2 information needed to make significant improvements in its detection efforts."

"Nonetheless, the IRS does maintain data that could increase its ability to detect tax returns with false income and withholding associated with stolen or falsely obtained EINs," it said.

In its response to the audit, the IRS said it does not want to jeopardize delaying genuine tax refunds when fighting fraud.

"Using the business tax return filing and withholding information will be helpful in identifying potentially fraudulent refund claims by individuals using false wage and withholding information; however, there is a risk of delaying the processing of legitimate tax returns filed by individuals whose employers are not compliant with their tax and/or information return filing obligations," said Peggy Bogadi, commissioner of the Wage and Investment Division at the IRS.

"Pending implementation of long-term corrective actions, we are reviewing options to adjust current processes to increase the effectiveness of fraud detection," she said.

Bogadi also said that the IRS is developing "fraud filters" to identify claims that need further review.

Published under: IRS