Report: IRS sent out billions of dollars in fraudulent returns

The IRS sent billions of dollars' worth of refunds to tax cheats around the globe in 2011, according to a new federal report.

Treasury’s inspector general for tax administration found that well over 1 million fraudulent tax returns made their way through the IRS’s defenses, costing the Treasury just under $4 billion. That includes more than $1 million sent to far-flung locales like Bulgaria, China, Ireland and Lithuania.

Still, the inspector general also noted that the IRS had improved its efforts to stop tax cheats who file returns using real Social Security numbers or other tax identification numbers.

The IRS reduced the amount it lost to identity thieves by around 30 percent in 2011, from more than $5 billion in 2010.

“Identity theft continues to be a serious problem with devastating consequences for taxpayers and an enormous impact on tax administration,” Russell George, the tax administration inspector general, said in a statement. 

“Undetected tax refund fraud results in significant unintended federal outlays and erodes taxpayer confidence in the federal tax system.”

The IRS has long acknowledged that identity theft is a big problem, and has made battling it a top priority. Taxpayers who file after an identity thief uses their Social Security number can face significant delays in the processing of their legitimate return.

For instance, the agency has more than twice as many employees working on identity theft cases now – around 3,000 – than it did in 2011, and has trained roughly 35,000 employees to deal with the issue. The IRS has also put new filters into place to weed out potential fraudulent returns, and beefed up its cooperation with local law enforcement.

But in a statement, the IRS also acknowledged that it was a challenge to keep up with “constantly evolving tactics used by scammers” while it had fewer resources at its disposal.

“Given significant budget cuts, the IRS continues to balance and shift our limited resources as our work on identity theft and refund fraud continues to grow, touching nearly every part of the organization to better protect taxpayers and help victims,” the agency said.

“Over the past two years, we have continued to improve our processes and systems for helping identity theft victims and have considerably decreased the time it takes to resolve these complex cases.”