Identity theft tax fraud on the rise with no easy fix

The Miami HeraldApril 17, 2012 

Last-minute filers have more to worry about than meeting today’s deadline to file taxes.

Many are likely to learn that someone else has beat them to the punch: identity thieves.

A growing crime across the country and particularly in South Florida, which leads the nation in reported incidents, according to the Federal Trade Commission, tax fraud by identity theft creates victims of taxpayers who must wait months or longer for their legitimate refund, and the U.S. government, which pays out the fraudulent refunds.

Michael Xavier of Pembroke Pines has been waiting more than one year for his $8,347 refund for income taxes withheld in 2010.

He’s also been waiting for an explanation from the Internal Revenue Service about how his identity was stolen and used to file a fraudulent tax return.

Xavier filed his tax return electronically in March 2011, and quickly learned that someone else had filed using his identity. He called police and filed a report, and mailed to the IRS the necessary affidavit, identity theft forms, and copies of his Social Security card, driver’s license and other information.

“I’m frustrated,’’ said Xavier, 41, a married father of three children. “No one is telling me what’s happening.’’

Trouble is, the IRS may still be trying to untangle the web of crimes that led to Xavier’s identity being stolen and a fraudulent return filed on his behalf.

But Xavier said he doesn’t understand why it’s so difficult for the IRS to verify his identity. He has filed his taxes jointly with his wife, Tamara, for 11 years — nine of those with the same home address.

He now has an IRS caseworker assigned to him, and a personal identification number for filing his tax returns in the future.

But still no refund.

The long wait, and the frustration of having to prove himself to the IRS, makes him feel more like a criminal than an honest taxpayer, Xavier said.

“If there’s an issue and they made the mistake on their end because somebody else filed, I’m not going to hold it against the IRS,’’ he said. “What I do hold against them is: You know me. You know where I’m at. I did the right thing, but I’m being punished for it.’’

Experts say identity thieves need only three pieces of information to file a fraudulent tax return electronically: a name, Social Security number and date of birth. This kind of personal information can be obtained from a variety of sources, including hospitals and trade schools. Identity thieves also target the personal information of the dead, which can be culled from publicly available lists.

The identity thief can make up the rest of the required information, including income and withholding taxes, and then have a refund wired to a pre-paid debit card that can be used in retail stores and banks.

By the time the IRS verifies the information, the identity thief is long gone, said Brad Gross, a Weston attorney and former prosecutor in the Internet and computer crime division of the Miami-Dade State Attorney’s Office.

“Right now, we can do a good job of detection and enforcement long after the crime is committed,’’ he said. “Once it’s done, you’re chasing after the guy who already hit and killed somebody on the road.’’

Delay in verifying taxpayer information is the primary weakness in the IRS’s electronic filing system, according to the U.S. Government Accountability Office.

The federal watchdog agency found that the IRS does not match tax returns to the W-2 income forms that employers file until months after the filing season ends in April.

Part of the delay has to do with the sheer volume of returns filed.

The IRS is responsible for processing more than 145 million individual income tax returns each year, including more than 109 million requests for refunds.

The great majority, about 77 percent of U.S. taxpayers, file electronically.

As electronic tax filing software has become more sophisticated and faster, however, identity theft has exploded.

The GAO reports that the number of tax frauds by identity theft reached 248,000 in 2010 — about five times more than in 2008.

Robert Judah, an accountant in Lauderdale Lakes, has seen a dramatic rise in the number of clients who are victims of tax fraud by identity theft.

“It seems like close to 10 percent of the returns are having their identities stolen,’’ Judah said. “Last year it was maybe 5 percent, the year before that only 1.’’

In the last two years, the IRS has “redoubled” efforts to fight tax fraud by identity theft, according to Steven T. Miller, the IRS’s deputy commissioner for services and enforcement, who testified before the U.S. Senate Finance Committee on March 20.

Miller told the panel that last year the IRS launched new software filters to flag fraudulent returns, and new procedures for handling suspect returns.

The agency also has begun screening the tax returns of recently deceased taxpayers, whose information is routinely released by the Social Security Administration. So far this filing season, the IRS has flagged 66,000 such returns for a second review.

The IRS also has issued personal identification numbers to taxpayers whose identities were stolen, in order to monitor their accounts. More than 250,000 PINs have been issued since December.

The results of these new measures: the IRS prevented $1.4 billion in refunds from being sent to identity thieves in 2011.

This year, the agency has stopped 215,000 questionable returns with $1.15 billion in claims, Miller told the U.S. Senate panel.

In 2010 and 2011, the IRS stopped more than one million suspected returns for additional review — a 72 percent increase over the previous year. But staffing for the IRS unit that manually verifies those returns grew by less than 9 percent.

Recent federal legislation may help combat the crime.

U.S. Sen. Bill Nelson, who presided over the March hearing, has sponsored a bill that would make it a felony, punishable by up to five years in prison, to use someone else’s Social Security or taxpayer identification numbers to file a fraudulent return.

To be sure, there is one way the IRS could prevent most tax fraud by identity theft: return to paper filing, said Nina E. Olson, the national Taxpayer Advocate for the IRS, who testified at the March senate hearing.

But Olson’s suggestion was tongue-in-cheek.

“Our tax system,’’ she said, “has shifted, for better or worse, to one of instant gratification.’’

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