Tax Refund Fraud

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A report from the Internal Revenue Service’s inspector general “estimates the IRS could issue $21 billion in potentially fraudulent tax refunds resulting from identity theft over the next five years.” The inspector general told CNBC that the fraud is a “growing problem” and that the numbers are growing “exponentially”:

The scam is so rampant that thieves are apparently sending in false returns in bulk without even bothering to change the mailing address on the returns. The inspector general said it found one residential address in Lansing, Michigan that was the source of an astonishing 2,137 tax returns, and to which the IRS directed more than $3.3 million in potentially fraudulent refunds.

In another case, a single residential address in Chicago was the source of 765 tax returns, generating more than $900,000 in potentially fraudulent refunds, the report said. “Once the money is out the door, it is almost impossible to get it back,” IRS inspector general J. Russell George told CNBC. “The bad guys know that the IRS is unable, given the limited number of its staff it has, to address every single allegation of tax fraud it has.”

Taxpayers should remember this story the next time a politician insists that a deficit reduction deal must include more revenue.

[See this Cato essay for more on fraud and abuse in federal programs.]