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Home / Expert Opinion / Fraud Facts: Refund fraud aided by complexity of tax code

Fraud Facts: Refund fraud aided by complexity of tax code

Gina Bliss

Feb. 3, 2013, was the 100th birthday of the 16th Amendment, which established the U.S Federal Income Tax. Congress enacted a 1 percent tax on net personal income over $3,000, with an additional tax on those who had net income over $20,000.

The filing deadline was March 1 until 1918 when it was changed to March 15. In 1955, the filing deadline became April 15.

One hundred years ago, no one could have anticipated the complexity of our current tax code, or the level of fraud that would result.

Refund fraud is rampant for a number of reasons. Refundable credits have been written into the tax law making refund fraud very attractive. Gaps in IRS security and the ease with which identity theft can be committed make refundable credits vulnerable to abuse.

Refund fraud is simple. An identity thief uses a taxpayer’s name and Social Security number to file a false return requesting a refund. The IRS won’t discover the fraud until the real taxpayer files a second return with the same Social Security number.

Fraudsters usually file early in the tax-filing season before the IRS is able to match Forms W-2 or 1099 to the return. The legitimate taxpayer will receive a notice after they file stating that more than one tax return was filed with their information.

For the 2011 filing season, the IRS processed approximately 145 million returns. About 109 million were claims for refunds and the average refund amount was almost $3,000. The Treasury Inspector General for Tax Administration estimated that identity theft accounted for approximately 1.5 million tax returns and a total of $5.2 billion.

In a recent case in Florida, Rashia Wilson and her boyfriend, Maurice Larry, filed more than 220 fraudulent tax returns claiming $1.9 million in refunds from 2009 to 2012. The IRS issued almost $1.3 million in refunds based on fictitious tax credits. All the returns reported either undistributed long-term capital gains credits of $9,987 or refundable Hope education credits of $1,000.

The pair conspicuously consumed the money on cars, jewelry and a home while Wilson bragged about her tax fraud expertise on Facebook. During that time, Wilson also collected $668 a month in food assistance from the state.

Investigators watched Wilson for over a year. They read her Facebook posts. When they finally arrested her it was on a weapons charge, which led to additional charges as they searched her home and a storage unit. The investigation was a joint effort of the Tampa Police Department, Hillsborough County Sheriff’s Office, Secret Service and the U.S. Postal Inspection Service.

Wilson is charged with 1 count of conspiracy, 9 counts of wire fraud, 19 counts of filing false tax returns, 14 counts of theft of government property, and 14 counts of aggravated identity theft.

—Wilson and Larry are just one example. Among items seized from them were ledgers of names with personal information that could be used to file future returns. You can take steps to protect yourself from the identity theft that enables this type of tax fraud.

If you do your own return online and submit it electronically, make sure you use an HTTP secure website, don’t open pop ups, use a strong password, and keep anti-virus and malware detection software updated.

If you mail your return, send it certified mail to avoid theft of the return in transit, watch your mail for Forms W-2, 1099s and other tax documents. Don’t leave documents with personal information on them around the house. They should always be secured.

The IRS will not call you or email you. They send official letters. Don’t respond to calls and emails that claim to be from the IRS because it’s actually an identity thief who is contacting you.

If you think you know someone who is committing tax fraud, the IRS wants to hear from you. The IRS Whistleblower Office pays money to people who blow the whistle on tax fraud. If the IRS uses the information, it can award the whistleblower up to 30 percent of the amount it collects.

Last year, the IRS issued its biggest whistleblower award ever to a former banker at UBS. Bradley C. Birkenfeld disclosed Swiss banking information that led thousands of wealthy Americans to participate in an IRS tax amnesty program that recovered more than $5 billion in unpaid tax. Mr. Birkenfeld’s award was $104 million.

That award is expected to spur momentum in the program. Just remember, if you successfully navigate the whistleblower program and receive an award, it will be fully taxed as ordinary income.

Gina Bliss, CPA, CFE, is a senior manager at EFP Rotenberg LLP, Certified Public Accountants and Business Consultants, who specializes in internal audit, fraud audit and forensic accounting. She can be reached at (585) 295-0536 or by email at [email protected].