Billions of dollars are being stolen from the U.S. Treasury through a combination of identity theft and related fraudulent tax returns. To make matters worse, much of this theft could be avoided by using procedures that are already known, and which would provide a dramatic return on investment.
In May, J. Russell George, the Treasury Inspector General for Tax Administration, testified before a joint hearing before two subcommittees of the House of Representatives Ways And Means Committee. The report deserves far more attention than it received. During this testimony, the Inspector General described both the scope of the problem, and how it could be rectified. But, the most remarkable piece of the testimony is the sad excuse why $5.2 billion of thefts are not being prevented – it is primarily an issue of not devoting less than $32 million of prevention resources. According to the Inspector General;
Using IRS estimates, it would cost approximately $31.8 million to screen and verify approximately 1.5 million tax returns that we identified as not having third-party information to support the income and withholding reported on the tax return. The net cost of not providing the necessary resources is substantial given that the potential revenue loss to the Federal Government of these identity theft refund fraud cases is $5.2 billion annually.”
The $32 million of needed prevention cost is a mere 0.6 percent of the expected savings.
The theft occurs by having fraudsters complete a fake tax return that shows a refund. The IRS processes the refund before the real taxpayer submits a tax return. The Inspector General summarized the nature of the fraud as follows:
A substantial number of individuals continue to submit tax returns reporting false income and/or withholding for the sole purpose of receiving a fraudulent tax refund. Many of these claims involve identity theft. For Processing Year 2011, the IRS reported that of the 2.2 million tax returns that it identified as fraudulent, approximately 940,000 tax returns with $6.5 billion in associated fraudulent tax refunds involved identity theft.”
Additional description of the problem and how the problem could be prevented are described in this article. One must wonder why Congress and the Administration have not already addressed this issue.