IRS, states fear wave of billion-dollar tax frauds

IRS, states fear wave of billion-dollar tax frauds
CHICAGO — State and federal officials are preparing for a wave of fraudulent tax filings next year after hackers stole personal information belonging to tens of thousands of Americans in a series of high-profile cases.
 
In recent years, organized gangs have used personal information exposed by breaches at the Office of Personnel Management and companies like Target and Home Depot to steal identities. 
 
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Those gangs are then able to file hundreds, or even thousands, of fraudulent tax returns at a time, requesting refunds be sent to overseas bank accounts or virtually untraceable debit cards.
 
The IRS estimates it lost $5.8 billion paying out refunds on fraudulent returns in 2013. States lose an estimated $8 billion to $9 billion annually, experts say.
 
But the scale of the fraud is much larger: The IRS says it caught and prevented $24 billion in fraudulent claims in 2013, the last full year for which figures are available. In June, the IRS said it had stopped $1.1 billion in fake returns through the first quarter of 2016.
 
"People's information has been compromised, and it's available for fraudsters to buy on the dark web," said David Ransom, a partner at McDermott Will & Emery. "States have increasingly been the target of these types of schemes."
 
Even lawmakers can fall victim to a fraud scheme. Last April, the IRS sent a message to Rep. Jim Renacci (R-Ohio) requesting more information on the tax return he had filed.
 
"It took me by surprise, because I hadn't filed my tax return," Renacci said in an interview. 
 
He spent two hours on hold waiting for an IRS agent's help. 
 
"Somebody had not only filed a tax return in my name and my wife's name, they had attached a W-2 to it from the House of Representatives, and they had all the Social Security numbers and addresses and they were requesting a refund,” Renacci said.
 
The refund would have been directed to a foreign bank account, Renacci and the IRS discovered.
 
Tax filing companies like H&R Block and Jackson Hewitt and software companies like Intuit find themselves on the front lines of preventing fraud. 
 
In 2015, an industry group called the American Coalition of Taxpayer Rights, led by Ransom, met with IRS Commissioner John Koskinen to address the rash of thefts.
 
"The tax system faces an unprecedented challenge, but the tax industry, the states and the IRS have responded with a remarkable collaborative effort that holds short term and long term promise to improve the protection of the nation's taxpayers," Koskinen said at the time.
 
The group is working to establish an Information Sharing and Analysis Center, similar to one used by the Federal Aviation Administration to spot emerging patterns and problems. The center is expected to become operational in 2017.
 
Congress has acted to slow the pace of some fraudulent refunds. The PATH Act, passed in 2015, included a provision that allows the IRS to hold refunds for those claiming the earned income tax credit until at least Feb. 15, an attempt by Congress to give the agency more time to verify information submitted by tax filers.
 
Renacci's experience spurred him to offer the Stolen Identity Refund Fraud Prevention Act, which would centralize a point for contact for identity theft victims, improve notification for taxpayers when the IRS suspects fraud and study the feasibility of opting out of electronic filings.
 
"How we ended up getting to this point is we are allowing for electronic filings, and we're allowing for refunds to be transmitted anywhere in the world, and even onto a debit card," Renacci said. "So we've made it easier for tax fraud to occur."
 
Renacci's bill passed the House earlier this year. The Senate Finance Committee has passed a similar package. Renacci said he hopes for a conference committee that might reach an agreement before the end of this Congress.
 
Renacci said he hopes his measure helps some of the 52,000 people in Ohio alone whose identities were stolen last year. And though it proved a massive headache, he said his own experience informed his proposed legislative response.
 
"The best way to understand a problem is to work through it. And that's what happened to me," he said.