IRS in Hot Water Over Tax Fraud

The Internal Revenue Service (IRS) is under a great deal of scrutiny today after a report was released highlighting fraudulent activity the organization allowed to occur.  The fraud has cost taxpayers tens of millions of dollars.

A report released by the office of the U.S. Treasury inspector general indicates that the IRS processed thousands of fraudulent applications for Individual Taxpayer Identification Numbers.  The report goes so far as to indicate IRS leaders actually discouraged employees from reviewing applications for Individual Taxpayer Identification Numbers.

The report highlighted mailing addresses that were used for multiple applications for Individual Taxpayer Identification Numbers.  While it is possible that an address may be used legally for more than one application for an Individual Taxpayer Identification Numbers, since a household or address can have more than one person living there, the results highlighted in the report extend beyond what could be considered reasonable.

The report focused on the applications for Individual Taxpayer Identification Numbers and other processing conducted by the IRS during 2011.  There were 154 mailing addresses used on more than 1,000 applications.  One address in Phoenix, Arizona, was used 15,795 times.

In addition, the report noted a number of applications where the filer had not proved their identity properly, which is likewise indicative of a fraudulent application and can allow the applicant to file a fraudulent tax return.

There were 10 addresses that were used for the filing of 53,994 tax returns, which were issued $86.4 million in tax refunds that were fraudulent.  One address in Atlanta, Georgia, was used on 23,994 tax returns resulting in refunds of $46.3 million.  Another address in Oxnard, California, was used for 2,507 tax return and led to the IRS issuing refunds of $10.4 million.

A separate report from the Treasury’s Inspector General for Tax Administration that was released in conjunction with the inspector general report uncovered 10 bank accounts to which 23,560 tax refunds were issued for more than $16 million.  The worst offender was a single bank account to which 2,706 tax refunds were issued for a total of $7.3 million.

The IRS was notified of the report and the results on July 16, three weeks before the results were released publicly.

Members of Congress are seeking a response from the IRS by the end of August.  Representative Charles Boustany, a Republican from Louisiana and the chairman of a subcommittee on oversight under House Ways and Means Committee, issued a letter to IRS Commissioner Douglas Shulman.  Boustany’s letter highlighted to Shulman that the IRS not only failed to train employees properly and establish procedures for identifying fraud but went so far as to instruct employees “from flagging potentially fraudulent ITIN applications.”

The IRS issued an initial response to the reports, indicating that the agency was moving “quickly and aggressively to address issues that were identified.”

The IRS letter also indicated, “We have already taken major steps to strengthen our documentation standards required in order to obtain an ITIN, and we have significantly increased our scrutiny of applications.”  The IRS has also implemented need processes and tools to allow employees to more easily detect fraudulent applications.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.