Washington— The Internal Revenue Service delivered 2,137 potentially fraudulent tax refunds totaling $3.3 million to one Lansing address during the 2011 filing season, Treasury Department investigators said Thursday.
The Lansing address, which was not specified in their report, accounted for less than half of the potentially fraudulent $8.1 million in refunds issued to the top of five addresses analyzed nationwide. In another aspect of the report that mentioned Michigan, Treasury investigators said Detroit addresses accounted for nearly 24,000 potentially fraudulent returns totaling $74 million, the fourth highest total in the country.
The returns were part of more than $5 billion in refund checks that may have gone to identity thieves filing fraudulent returns, investigators said. They estimate another $21 billion could make its way to ID thieves pockets over the next five years.
The IRS is detecting far fewer fraudulent tax refund claims than actually occur, according to a government audit that warned the widespread problem could undermine public trust in the U.S. tax system. Although the IRS detected about 940,000 fraudulent returns for last year claiming $6.5 billion in refunds, there were potentially another 1.5 million undetected cases of thieves seeking refunds after assuming the identity of a dead person, child or someone else who normally wouldnt file a tax return.
In the Lansing example, investigators found a single address that was used to file 2,137 separate tax returns. The IRS issued more than $3.3 million in refunds to that address. Three addresses in Florida, the epicenter of the identity theft crisis, filed more than 500 returns totaling more than $1 million in refunds for each address.
In another troubling scenario, hundreds of refunds were deposited into the same bank account — a red flag for investigators searching for ID thieves who may be filing for refunds for multiple people. In one instance, the IRS deposited 590 refunds totaling more than $900,000 into one account.
“We found multiple reasons for the IRS inability to detect billions of dollars in fraud,” J. Russell George, the Treasury Departments inspector general for tax administration, in a statement. “At a time when every dollar counts, these results are extremely troubling.”
Topping the list of concerns is the IRS lack of timely access to third-party information it needs to verify returns and root out fraud.
With so many Americans struggling to pay their bills, the IRS is under immense pressure to process and issue refunds promptly. But taxpayers can start filing their returns in mid-January, while employers and financial institutions dont have to submit withholding and income documents for taxpayers to the IRS until the end of March. That means the IRS often issues refunds long before it can confirm the veracity of whats listed on taxpayer returns.
Thieves are also exploiting vulnerabilities in the way the IRS delivers refunds, investigators found. Of the 1.5 million undetected cases of potential fraud, 1.2 million used direct deposits, including pre-loaded debit cards. Thieves often prefer those methods to a paper check, which require a physical address to receive the check and photo ID matching the taxpayers name to cash it.
IRS officials said the growth of identity theft-related fraud is one of its biggest challenges. Already this year, the agency has stopped almost $12 billion in confirmed fraud, it says. And it says its criminal investigators are actively pursuing those who perpetrate fraud.