by Gail Perry
Identity theft. Stolen Social Security numbers. Falsified W-2 forms. These are the tools of the fraudulent e-filers. These are “taxpayers” who electronically file fake tax returns asking for refunds to which they’re not entitled, so that they can cash in on the quick refund anticipation loans offered by the electronic tax filing services and their associated lenders.
Gary Bell, director of the Office of Refund Crimes in the Internal Revenue Service’s criminal investigation unit, warned that this area of fraud is growing rapidly. According to a statement he produced earlier this year, one in every 966 e-filed returns in 2003 was fraudulent. Three years earlier the number of fraudulent e-filed returns was one in 4,789.
Tax preparers at national CPA firms may not encounter this problem with their clients. This is more of an issue for the street-front tax preparation services.
“Your CPA firms generally have a client base that’s established, that’s well known,” said Bell. “The tax preparation services have a more continually changing client base.”
Bell described fraudsters who pose as taxpayers while using bogus W-2 forms as well as stolen identification. They may have been recruited to go into the tax preparation offices “using false identification and stolen Social Security numbers, so they are not who they purport to be to the practitioners,” said Bell. Sometimes the alleged taxpayers will return to the same offices multiple times, each time carrying different tax documents and calling themselves by different names.
Another group of e-fraudsters is made up of perpetrators who infiltrate a tax preparation office by taking jobs as preparers. “They’ll actually have employees in the offices who are putting the returns in the system,” explained Bell.
IRS statistics show that at least 75 percent of all fraudulently e-filed returns come from electronic return originators, and many ERO offices are specifically targeted if the perpetrators have determined that security controls are weak. Bell cited 150 ERO offices last year that each filed more than 50 bogus tax returns.
The IRS claimed that it is on top of winnowing out the majority of the falsely filed returns; however, the exact number or percentage of fraudulent returns caught by the IRS’s detection process is not published.
“We have a pretty sophisticated system called the Electronic Fraud Detection System,” explained Bell. The system includes a scoring model based on data-mining technology that compares relationships and issues on tax returns to information in various databases, scoring the returns for fraud potential. “Every tax return with a refund” goes through the EFDS, said Bell.
The IRS may feel confident about its ability to detect the majority of fraudulently filed returns, but the problem arises when it may take the IRS three or more weeks to process the return, especially in the peak of the spring filing season. Meanwhile, the RAL lenders have processed the loans within a couple of days of the return being filed, the money is in the hands of the bad guys, and they can disappear without a trace, since the names and addresses that they provided were fabricated or stolen from somebody else.
By the time the IRS notifies the ERO that the refund request has been rejected, the money and the perpetrator are long gone. “No matter how good we get, there’s still a significant amount of money from the loans that goes into the pockets of the fraudsters,” said Bell.
The IRS is also focusing its resources on educating tax preparers and RAL lenders.
Since the IRS is determined to continue its attempt to reach a goal of 80 percent penetration of electronically filed tax returns by 2007, the e-file nuisance isn’t likely to go away. The Criminal Investigation Division of the IRS has been conducting seminars geared at training tax preparers to be on the lookout for suspicious-looking documents such as non-electronically produced W-2s and refunds that are to be mailed to a post office box.
The IRS has encouraged EROs and RAL lenders to notify the IRS if there is a suspicion of fraud. Apparently it’s a system that works, when done properly. “This year, as of the end of June we had over 13,200 fraudulent W-2s referred to us from the private sector,” said Bell. “Forty-two percent of those were fraudulent.”
Bell also recommends that practitioners take extra time in checking the backgrounds of the employees they hire. “We’re seeing more infiltration of employees working for the fraudsters going into the offices,” he explained. “They really need to be more diligent and careful of how they screen and hire their employees.”
Suspected fraud can be reported to the IRS by calling (800) 829-0433.
