Fraudulent Tax Refund Attempts Caused Delays for Legitimate Taxpayers in 2012

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The Internal Revenue Service identified 39.1 percent more attempts at fraudulent tax refunds last tax season than in the prior year, leading to tax refund delays early in tax season.

Most tax refunds were processed on a timely basis last tax season, according to a new report from the Treasury Inspector General for Tax Administration, even though problems with tax credits and early-season refund delays presented significant challenges.

TIGTA found that as of April 28, 2012, the IRS had identified tax returns with $6.4 billion claimed in fraudulent tax refunds and prevented the issuance of $6.1 billion (95.3 percent) of the fraudulent tax refunds. That number represented a 39.1 percent increase in the number of fraudulent tax refund attempts identified as of the same period in 2011.

“Our report found that more unscrupulous individuals than ever are submitting fraudulent tax returns, but the good news is this: The IRS is doing a better job of stopping fraud in its tracks,” said TIGTA Inspector General J. Russell George in a statement.

The amount of fraudulent refunds stopped by the IRS continues to grow each year. TIGTA found that the IRS identified 2.1 million fraudulent-refund returns in 2011, up from 971,511 the previous year, and while it stopped $6.9 billion in fraudulent refunds from being issued in 2010, in 2011 it stopped $14.3 billion in fraudulent tax refunds.

The annual filing season report found that the IRS processed the majority of individual income tax returns on a timely basis during the 2012 filing season. While year-end data for the 2012 filing season will not be available until December 31, the data through April 28, 2012 reflect the majority of the returns processed during the filing season. As of April 28, the IRS received more than 133.4 million individual tax returns and issued slightly more than 99.1 million tax refunds totaling approximately $269 billion.

However, some taxpayers who electronically filed early in the season experienced delays in receiving their tax refunds. The IRS indicated that it had problems with the filters it established to identify fraud and with the program used by the Modernized e-File system (see IRS Fraud Detection System Leads to Refund Delays).

As of April 28, 2012, the IRS had identified tax returns with $6.4 billion in fraudulent tax refunds and prevented the issuance of $6.1 billion of the fraudulent tax refunds. The IRS also identified 210,473 tax returns filed by prisoners for fraud screening, a 5.3 percent increase compared to last year. The IRS assisted approximately 2.3 million individuals at its Taxpayer Assistance Centers and received approximately 90.4 million attempts from taxpayers calling the various Customer Account Services function toll-free telephone assistance lines.

TIGTA also found that the processing of some tax credits continued to present a challenge. While the IRS has improved its processing of Homebuyer Tax Credit repayments, some taxpayer repayments continue to be inaccurately processed, resulting in nearly $2.6 million in erroneous refunds and more than $290,000 in incorrect assessments to taxpayers’ accounts. Other problems involving credits in 2012 include:

• 125,684 taxpayers claimed more than $29.7 million in erroneous Nonbusiness Energy Property Credits;

• 109,618 taxpayers claimed more than $159 million for the American Opportunity Tax Credit for students who, based on age, are unlikely to be pursuing an undergraduate degree or vocational certification.

TIGTA’s recommended that the IRS initiate recovery programs for erroneously paid claims and that it ensure that Homebuyer Credit claims are processed correctly. IRS management agreed and implemented corrective actions for all the recommendations that included changing computer programming, updating processing procedures, and initiating recovery procedures for credits that were erroneously refunded.

“We implemented several new fraud detection filters this year, more than doubling the number of fraudulent returns identified and refunds prevented,” said Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division.  “Throughout the IRS, organizational units are collaborating to improve our ability to detect fraudulent returns filed by identity thieves, stop those returns, and assist the victims.  New initiatives underway include the formation of the Taxpayer Protection Unit to address reported or suspected occurrences of identity theft, as well accelerating the availability of third-party data to our employees charged with reviewing and evaluating questionable returns.”

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