Washington News

The IRS, the Justice Department and Congress all recognize that stolen identity refund fraud (SIRF) is a major and growing problem. With the increase in electronic filing, individuals are obtaining the Social Security numbers and names of other persons and filing to claim their tax refunds. The Justice Department estimates that there could be up to $26 billion in fraudulent refunds over the next five years.

Assistant Attorney General Kathryn Keneally of the Tax Division of the Justice Department conducted a briefing on September 27 in Washington. She acknowledged, "The stolen identity refund fraud cases present a different kind of crime than we usually see." Keneally continued and explained the depth of the problem. Treasury officials understand that greater efforts are needed by the IRS, Department of Justice and U.S. Attorney's Office to confront the problem.

How do most identity thieves operate? The essential information for an identity thief is a name and a Social Security number. There are at least three ways that identity thieves are collecting this information and receiving tax refunds. First, some have persuaded a postal employee to intercept multiple refunds to an address. A second strategy might involve the use of a doorman to direct refund checks to the identity thief. Third, bank tellers have been bribed to collect the personal information necessary for the identity thief to file and obtain a fraudulent refund.

Two areas of the country are particularly affected. Southern District of Florida U.S. Attorney Wilfredo Ferrer acknowledged the problem there. He stated, "This is the fastest growing and most insidious fraud in this district right now. It's sort of like the crime du jour." He is regularly finding victims "from all walks of life" who had their identities stolen so the thief could collect a "bogus tax refund." Ferrer disclosed that there are even victims who work in the office of the U.S. Attorney.

Another area with a significant problem is the Southern District of New York. Deputy U.S. Attorney Richard Zabel pointed out that many New York thieves are involved in tax fraud. He stated, "It's like Willy Sutton – Why do you rob banks? Because that's where the money is. Well, if you're doing identity theft, the big money is in the Federal Government's bank account."

The IRS recognizes the challenge with eFiling. On the one hand, the IRS has greatly improved the speed of refunds for lawful taxpayers who eFile. In addition, the eFiling of tens of millions of tax returns saves a huge amount of time and cost for the government in processing tax returns.

However, the challenge with eFiling is that the thieves are able to obtain information and file before the legitimate taxpayer. By the time the actual taxpayer files, the thief has received the refund. In some cases, thieves have promptly transferred the funds outside of the United States.

Some thieves are operating on a fairly large scale. Attorney Zabel referred to one case in New York in 2009. Two individuals filed 7,000 false returns and requested a total of $72 million in refunds. Because the refunds were sent to the same address, the fraud was discovered.

Congress has several bills under consideration that would address the problem. Keneally noted that there are also several regional tax task forces that are moving forward to find and prosecute identity thieves. The Department of Treasury, Department of Justice and the U.S. Attorney's offices are all cooperating.

In addition, the IRS is updating its computer software. If there are multiple refunds to one address or indications that the refund may not be appropriate, the software will "flag" the return for greater review.