The IRS may have given out over $5 billion in refunds to the wrong people for 2011. So far the IRS has detected about 940,000 fraudulent tax returns filed by identity thieves last year, with potentially over 1 million more false tax returns as yet unidentified. Usually an identity thief uses a stolen Social Security number to file a bogus tax return and get a refund early in the filing season. You may not even be aware this has happened to you until you file your real tax return later in the season and get an IRS notice that a return has already been filed in your name.
Part of the problem is the IRS’ attempt to be taxpayer-friendly. Many Americans are struggling financially, and the IRS strives to process returns and issue refunds quickly. They accept tax returns starting in mid-January, even though employers and financial institutions don’t have to issue W-2’s and income documents to taxpayers and the government until the end of March. That creates a situation where the IRS issues refunds to identity thieves before the information on the fraudulent return can be confirmed – or before the real taxpayer has all the information they need to file their real tax return. Thieves are also exploiting ways the IRS delivers refunds: The thief usually doesn’t want a paper check refund that requires delivery to a physical mailing address and a photo ID to cash it at the bank. They prefer refunds through direct deposits, including through debit cards, which are harder to trace.
It is now very common to receive an IRS notice of deficiency based on tax return(s) in your name. Many of the assessments could be based on an invalid tax return that you, the true taxpayer, did not file. These notices generally allow you 90 days to petition Tax Court – but who wants to go to Tax Court for a tax return you didn’t even file? The IRS recently issued Program Manager Technical Advice 2012-13 (“PMTA”) answering some questions about these notices:
- The IRS has the authority to remove assessments that were based on a bad return before the 90 day period.
- If the taxpayer can establish they did not submit the fraudulent tax return, the IRS should remove the deficiency notice if the taxpayer consents. (FYI: the IRS can still issue a notice if the IRS thinks there’s a deficiency on the victim’s actual tax return.)
PTMA did not address all potential issues such as deficiency notices sent to a false address (the victim wouldn’t even know they’re in trouble).
The recovery process for tax identity theft victims can be a very rocky road. The IRS is not equipped to handle the volumes of innocent citizens affected, and the typical taxpayer doesn’t know how to get the IRS’ attention. Call Gary Kaplan if you have become a tax victim, or if you want guidance on how to minimize the chance of tax fraud abuse.
