The option of allowing taxpayers to split up their tax refunds into different accounts has increased the risk of fraud, perhaps even among IRS employees, according to a new government report.
J. Russell George
The report, released Thursday by the Treasury Inspector General for Tax Administration, found that in calendar year 2011, more than 842,000 taxpayers took advantage of this “split refund” option, which the Internal Revenue Service first offered in 2007. Taxpayers are able to split their tax refunds between two to three different checking or savings accounts using Form 8888, Allocation of Refund (Including Savings Bond Purchases).
However, TIGTA found that more than 65,300 bank accounts had multiple direct deposits, accounting for more than 949,000 refunds for approximately $1.6 billion.
Auditors discovered that current IRS processes that are supposed to ensure the accuracy of direct deposit information are insufficient, increasing the potential of fraud. In addition, the option to split a refund between multiple accounts expands the risk of fraud.
“This is troubling,” said TIGTA Inspector General J. Russell George in a statement. “The IRS’s current practice of allowing direct deposits to be made to multiple accounts increases the potential for fraud and abuse.”
TIGTA identified more than 4,400 bank accounts listed on tax preparers’ personal tax returns that had multiple direct deposits. More than 202,000 refunds for more than $309 million were sent to these bank accounts. This raises a concern as to whether tax return preparers are diverting clients’ refunds or portions of refunds to their own bank accounts to pay tax preparation fees or for other reasons. TIGTA said the overall objective of its audit was to evaluate the IRS’s controls over the direct deposit of refunds.
TIGTA also identified more than 200 bank accounts listed on IRS employees’ tax returns that had multiple direct deposits. More than 10,600 refunds for more than $14 million were sent to these bank accounts.
TIGTA recommended that the IRS establish controls to identify tax preparers and IRS employees who potentially divert direct deposits to their own bank accounts. In response to the report, IRS officials agreed with the recommendation and plan to take appropriate corrective actions.
“With regard to the finding of accounts receiving multiple deposits from multiple taxpayers, it is important to note that the Treasury Inspector General for Tax Administration has not verified ownership of the bank accounts in question,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division. “There are circumstances where multiple deposits to a single account are legitimate and acceptable. Thus, the IRS must initiate appropriate investigatory proceedings to ascertain ownership. Nonetheless, we agree with the TIGTA that the findings are indicative that additional controls are needed to identify and question these multiple deposits and the IRS is making changes in this area for the 2013 filing season. Still, caution must be exercised in drawing conclusions as to the extent of fraudulent activity present.”
6 Comments
The IRS should place internal controlls regarding each tax payer who is receiving the refund. The name, social security number and DOB are the first three mandatory verifications. THe IRS should match the name on the tax return and the name on the bank account to be the same. A secondary match is the social security number should also the DOB. If these match then the electronic deposit should be completed. If not then issue a paper check sent to the taxpayer's listed address on the tax return.The IRS should discontinue pre paid credit or debit cards.These are used by many fraudsters and are not traceable after use. Many cases have been cited to the IRS especially comming out of FLorida. Yet the IRS made no moves to correct this problem.
Posted by: manscpallc | November 16, 2012 7:35 PM
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As per IRS Publication 947 under RESTRICTIONS: "Negotiations of taxpayer refund checks. Practitioners must not endorse or otherwise negotiate (cash) any refund check (including directing or accepting payment by any means, electronic or otherwise, in an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated) issued to the taxpayer"
Ref:http://www.irs.gov/publications/p947/ar02.html
Taxpayer should sign "Direct Deposit Summary" to authorize direct deposit into ANY account. IRS should include a signature line on form 8888 or restrict direct deposit into any other accounts other than taxpayers.
Posted by: Sander V | November 16, 2012 2:23 PM
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I've never done this but it occurs to me that some preparers may arrange to have their fee paid from a refund. How would those sorts of arrangements be differentiated from potential fraud?
Posted by: cheryl b | November 16, 2012 12:36 PM
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While I do agree that additional control is needed, I do not believe these are the major issues with tax fraud and identity theft.
There ARE circumstances where multiple direct deposits to a single account are not fraud. Many times, lower-income taxpayers agree to pay a personal loan from their tax refund, and will have it sent directly to the other person's account using Form 8888. Also, not every working person or child has a bank account, so frequently, a parent or other relative agrees to accept the direct deposit on the other taxpayer's behalf in which case the accepting taxpayer may receive more than one direct deposit.
So you can want to say they should go get a prepaid debit card, but it is exactly those cards that are allowing all the fraud to happen so easily. At least a bank account is generally more traceable when an identity theft does come to light.
Posted by: YourTaxEdge | November 16, 2012 12:28 PM
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The paper check doesn't work if it's sent to the fraudulent address on the return - they'd have to send it to the address on the prior year return to possibly get it right.
Posted by: marykayf | November 16, 2012 11:36 AM
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A simple way to eliminate this problem is to require the Name and SSN on the account to match the name and SSB on the refund. If they don't match the direct deposit of the refund is rejected and a paper check is sent to the taxpayer instead.
Posted by: RNeilson | November 16, 2012 11:29 AM
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