If the stock market tripled over the course of one year and then doubled again in the following 12 months, we’d all be dancing in the streets. Unfortunately, that record belongs to something far less positive: the increase in fraudulent tax returns involving identity theft. This trend is transcending that Acting Internal Revenue Service Commissioner Steven Miller calls it “one of the biggest challenges facing the IRS today.”
The number of fraudulent tax returns has exploded in the past two years. In fiscal year 2011, the IRS launched 276 criminal investigations related to identity theft, a crime which involves someone filing for a tax refund using the Social Security number or tax ID number of another individual.(1) The next year, there were 898 probes. A third of the way into the 2013 fiscal year, we’re on track for that number to double.
Miller has pledged to aggressively pursue and prevent refund fraud and identity theft and the agency has established an “Identity Theft Clearinghouse” within its criminal investigations unit and assigned 3,000 employees the task of identifying, pursuing and resolving these cases. As a signal to would-be perpetrators, last month IRS agents, in coordination with the Department of Justice and local law enforcement officers, launched a major sweep targeting 389 individuals in 32 states plus Puerto Rico. (See the map below.) The effort culminated in 734 “enforcement actions”- arrests, indictments, complaints, search warrants- related to I.D. theft and return filing fraud.
The IRS is also employing technology in an effort to catch phony returns before they are processed. A spokesperson says IRS computers now screen for dozens of entries which could signal that a tax return is bogus. The IRS claims it stopped $20 billion in fraudulent refunds last year, an increase from $14 billion the year before.
The courts are taking this kind of criminal activity more seriously, as well. According to IRS data, conviction rates as well as the length of prison sentences are higher for tax scammers. On average, jail time is running around four years, though some recent cases have resulted in considerably more.
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Just this month, an Alabama woman who worked at a tax preparation firm, got 12 years in prison and was ordered to pay almost $1.3 million in restitution for masterminding two tax fraud operations. Over several years and with the help of several accomplices, she filed more than a thousand fraudulent tax returns claiming $1.7 million in refunds. In some cases, the stolen identities were obtained by a state employee who had access to databases containing personal information about Alabama residents.
It's common for one person to act as the ringleader and recruit member to help, including family members. Another Alabama case (also involving a tax preparation service) resulted in the indictment of eight individuals who were all related. The sentences were wide ranging and included probation, home detention and up to 57 months in prison. In addition, the court ordered $1.9 million in restitution.
In January, a Georgia man who operated a bookkeeping and check cashing service out of his home was sentenced to five years in prison.
Those engaged in these crimes come from all backgrounds. Last December a former New Jersey chiropractor was indicted for filing $1.2 million in fraudulent refund claims. Victims are diverse, as well. Children and dead people are both popular since they’re not likely to file a return themselves.This reduces the chance the return will be questioned because the same Social Security number is being used twice.
It’s important to remember that tax ID theft isn’t just a crime against the federal government and, by extension, honest taxpayers. It has serious and potentially long-lasting consequences for the individuals whose identities are misused. It damage their credit records and holds up the tax refunds that these persons are legitimately entitled to.
Still, it takes time just to identify the legitimate filer. Consider the fact that about 10 million of us move every year. People switch jobs. Some enter the world, and others die. Names change. In short, clearing your record and getting your refund issued is far from an overnight process.
The IRS website contains information about protecting yourself from tax return ID theft and steps to take if you think your identify has been compromised. The tips include the usual advice such as safeguarding documents that contain personal information, not carrying your Social Security card, adding anti-virus/spam software to your computer, checking your credit report regularly and not giving out identifying information unless it’s absolutely necessary.
[Speaking of which, it always startles me how quickly we blurt out or fill out our Social Security number at the doctor’s office. Have you ever asked yourself why your doctor needs your Social Security number? Moreover, who makes sure that the workers who clean the doctor’s office don’t rifle through the patient folders lining the walls? Are documents containing sensitive information shredded or just tossed into the trash? Here’s another personal pet peeve: Why does Medicare insist on printing your Social Security number on the card it issues to everyone 65 and older? Can’t they come up with a way to encode this information?If your doctor or some other establishment claims to need your Social Security number, it’s worth asking, “Can I give you another piece of identifying information?” For instance, a driver’s license. Bonus: It includes your photo. What have you got to lose? ]
One major sign that your identity has been stolen is if you receive a letter from the IRS telling you that another return was filed using your tax I.D./Social Security number. If that occurs, do not ignore this notice. Respond immediately as directed by filling out the IRS Identity Theft Affidavit. This gets the process of clearing your name- and releasing your tax refund- started.
If you have been a victim of tax ID theft, you will receive a secret PIN (personal identification number) to enter on your tax return. In the event a criminal files a return using your information, the PIN tells the IRS that your return is the legitimate one. This helps get it processed quicker. Last year, a quarter of a million taxpayers were issued PINs.
For more information, here is a good place to start.
1. The federal government’s fiscal year runs from October 1st through September 30th.
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
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