Identity Theft

IRS May Have Missed $5.2 Billion in Fraudulent Returns

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In recent years, fraudsters have been able to mine a rich vein of potential identity theft by filing bogus tax returns for other people. But while the IRS has tried to come down hard on this type of criminal, many may still be slipping through the cracks.

As many as 1.5 million tax returns that could be related to identity theft and fraudulent filings were not detected by the IRS for 2011, and the cost of those refunds could be as high as $5.2 billion, according to new data from the Treasure Inspector General for Tax Administration. In all, the IRS said it only caught 938,664 returns with fraudulent refunds associated with them, totaling $6.5 billion in payouts.

TIGTA data shows that known instances of identity theft related to fake tax returns has doubled from 2009 to 2011, indicating crooks are catching on that this is a potentially lucrative type of crime, the report said. As such, the agency has recommended new methods by which the IRS might be able to spot and deny a larger number of bogus claims.

This should include the development of new processes for verifying wages and other data for people just starting new jobs, using the National Directory of New Hires, the report said. When this isn’t possible, the IRS should instead rely on other third-party income and withholding data. For its part, the tax agency agreed it should do this.

Further, the TIGTA recommended the IRS try to develop ways to identify similar characteristics across all known fraudulent tax returns so that it could make its filters for spotting them more accurate and effective, the report said. For instance, many times, a large number of these phony documents are sent from the same address – an indicator that all these returns may have been filed fraudulently.

Of course, consumers can also do more to make sure they have not been hit by this type of identity theft, which includes making sure to pick up and secure all mail and other personal documents that contain identifying information. Further, they may also want to regularly order copies of their credit reports so that they can potentially spot any accounts that may have been opened in their name, but without their knowledge.

Image: bradleygee, via Flickr

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