IRS not trying to catch this tax fraud?

Factual Questions
1

There’s this thing circulating on the Free-Republic type sites that says the IRS is allowing itself to be defrauded of millions of tax dollars by assigning ITINS to questionable refund applications and going ahead and sending the money. See an example story here.

On reading that story the first time, I assumed the reality was being misreported, and that the bank account in question was kind of a “place holder,” not actually going out to the applicant(s), and that the purpose was just to not spend the effort in tracking down every fraudulent application but instead to put them through the necessary scrutiny only if someone actually came looking for the money that had been set aside.

But on reading the actual inspector generals report, it appears to me that was too charitable. Apparently there really are thousands of applications using the same bank account, and millions of dollars really were deposited into that account for access by those (or “those”) applicants. (Do a string search on “7,319,518” to find the most relevant section of the report.)

How it is known this has something to do with undocumented workers I do not know.

But anyway, just to make sure, am I reading this right? Was it not an IRS placeholder account for setting aside the money, instead being an actual account used in actual applications? Is the IRS actually not set up to detect something like this?

(It’s millions of dollars, but of course that’s miniscule in the scheme of things so they may just not care about small potatoes like this.)

(Also whatever’s the actual outcome here, it seems to me to be a case of “the system is not perfect but does work in the long run” since this is all about an internal audit, not like someone outside the IRS has caught them doing something wrong.)

2

The first and only thing I read about this was the snopes article about it. It does appear from that that the money was placed in actual accounts. But they do make clear that people saying it’s a sure sign that illegal immigrants are the ones doing this are jumping to conclusions:

What I wonder is, if there is evidence that undocumented workers are doing this is it actually costing the IRS anything? If this is a situation where undocumented workers are paying taxes throughout the year, filing a return, and either collecting or getting scammed out of the refund on the amount of tax they overpaid I’m only going to be bothered on behalf of the undocumented workers for being scammed.

3

The IRS is trying to catch tax fraud. The IRS is also tasked with issuing hundreds of millions of refunds as quickly as possible. The two imperatives conflict, so the IRS does the best it can to not screw up too much on either end.

Here are some thoughts about the issue:

First, illegal aliens is totally irrelevant to the issue. You have a requirement to file a tax return, and a right to a refund, as long as you have source income from the United States (and, for US citizens, even if you have income anywere in the world). The IRS is not the INS and is not tasked with enforcing immigration law. They’re solely concerned with administering tax law.

Second, ITINs are extremely common. The linked CNS article oversimplifies the case by saying there are only two reasons to get an ITIN. ITINs are also issued to foreign children and spouses of legal workers, for example.

Third, an ITIN can be stolen and mis-used for identity theft just like an SSN can, so the issues about fraudulent ITINs may or may not be related to the fraudulent returns. (If you do a search elsewhere, you’ll see that fraudulent returns using senior citizens’ and prisoners’ SSNs is also very common.)

Fourth, this is really old news. The IRS has already taken several steps to correct both the review of potentially fraudulent returns, and the review steps taken for ITIN processing. Numbers are already out that the number of ITIN applications rejected are double what they were in 2011. (And I can tell you from personal experience, they’re now being rejected even for stupid reasons. I now refuse to take clients who need an ITIN application because it’s not worth the hassle.)

Fifth, individual bank accounts receiving all these refunds: this is standard industry practice. All those rapid refund loans, refund debit cards, etc. offered by H&R Block and others - all of those mean that millions of tax refunds are going to a few centralized accounts. So it doesn’t look particularly unusual to the IRS when this much money goes to one account.

So… in conclusion: the IRS needs to continue to be diligent. There is certainly room for improvement, and they are also responding to continually changing issues. However, this is a damned-if-you-do-damned-if-you-don’t scenario. The IRS will be blamed for fraud when they make things easy and they’ll be blamed for delays when they make it difficult. It’s important to keep in perspective that $7 million is a tiny fraction of the total $320 billion of refunds processed. (In fact, it is just 0.0022%).

4

I recall seeing a congressional hearing with the IRS where thousands of businesses where sharing she same foreign address. The IRS rep’s response was “We don’t check for that [sort of thing]”, which he explained as they review returns individually, but don’t look for patterns like massively shared addresses and the like. I assume massively shared account numbers would be overlooked the same way.

5

Note that there’s more than $7 million at issue.

Use of the same account number is not necessarily a big deal, but 24,000 refunds in one year to the same home address in Atlanta ought to raise a flag. That address alone got $46 million in refunds. The top ten addresses with multiple refunds had an aggregate total of 54,000 refunds and received an aggregate total of $86 million. (See report p.18).

That’s still not much out of an overall total of 3 million ITIN refunds for $7 billion, but the top ten is not the whole extent of the fraud, either.