IRS Dropping the Hammer on Identity Thieves

Internal Revenue Service and Identity Thieves

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You might not have heard, but in January, the Internal Revenue Service kicked off a massive nationwide effort. That effort was to rein in identity thieves and it’s revealed even more problems, especially in the nation’s prisons.

The numbers are impressive. The government agency’s sweep brought 389 identity theft arrests, 740 enforcements of other arrests and indictments and the sweep has already hit at least 38 states. But it didn’t stop there.

Check Cashing Stores

Check cashing companies are finding themselves in the crosshairs, as well. So far, it’s visited more than 200 businesses around the country to ensure they’re not aiding identity thieves. In fact, IRS acting commissioner Steven Miller said he hopes these actions will send a message that the agency is serious about identity theft, which is “one of the biggest challenges facing the IRS today.”

Because it’s tax season, there’s a lot of attention on these nationwide problems. Miller also said that because of the growing intensity in these types of crimes,

we want to be clear that there is a heavy price to pay for perpetrators of refund fraud and identity theft.

He said the effort has never been as widespread as what’s occurring now.

Fraudulent Refunds Increasing

In 2011, the IRS prevented more than $20 billion in fraudulent refunds from being issued. That’s $6 billion more than it was in 2011. It’s also amping up its personnel, assigning more than 3,000 employees whose only jobs are to prevent and investigate these identity crimes. This is double the numbers from last year and speaks volumes about the growing problems. That bust resulted in 223 prison sentences – and it’s more than double the number of convictions in 2011. Just as important, the sentences are getting longer. On average, in 2012, identity crimes are being hit with four year sentences, which is up by four months from 2011.

Not Walking the Streets

Most of us are aware of our surroundings, even in the “real” world or our virtual worlds. The last thing we’d expect is to fall victim to a criminal who’s already in prison. But that’s exactly what’s happening. In fact, in 2010, there were more than 91,000 inmate returns that included a whopping $758 million in fraudulent refunds. That number is double from what it was the year before. While the IRS stopped the vast majority of fraudulent refunds from actually getting into the hands of prisoners, $35 million still slipped through the cracks.

Meanwhile, Thomas Cooke, Professor of Accounting and Business law at Georgetown University, says there are no limitations to the extent criminals will go to. The fact that identity theft, credit card fraud and other financial crimes is ballooning is proof that it’s going to take a united effort between consumers, law enforcement and law makers to get a handle on it. Cooke said that it’s easy for prisoners,

Identity theft is all too common today and filing a return with fraudulent data is all too easy.

The numbers are growing on the wrong side of the prison bars. There were significantly more fraudulent prisoner tax returns in 2012 than in 2011. The answers are easy, too. Remember, these prisoners often have nothing to lose and if they can pull it off one time out ten or one hundred times, then that’s extra money for the prisoner’s commissary. It’s a lucrative career choice for those who are in jail. It’s alarming that the incarcerated can gain that kind of access to consumer information; unfortunately, many say it’s easily found with just a bit of knowledge. Some instances include prisoners using the identities of fellow prisoners, too. And then there are those on the outside. By offering a cut of the refund in exchange for their help, many are more than happy to accommodate those criminals.

It’s very profitable for criminals. You may have heard about the sentence handed down in late 2012. A Missouri inmate pleaded guilty to stealing close to 140,000 in refunds that were fraudulent. Preparing the tax returns was a breeze for the leader, who carefully used the prison typewriter to doctor different documents. The refunds were then sent to friends and family on the outside, who promptly dropped them into a mailbox.

A more disturbing case is found in the guilty plea of another inmate on the west coast. He was charged with filing seven fraudulent tax returns and net a whopping $3.5 million. It took years for the IRS to catch on to the criminal behavior. Other prisoners have honed in and claimed wages from companies that filed bankruptcy in recent months since these wages can be harder for the IRS to confirm. Still others are believed to be part of a bigger crime ring.

Stopping the Fraud

Stopping the fraud is challenging and even though many cases are caught before they make it through the system every year, there are still those who are able to slip through the cracks. Then there are those white collar criminals who might actually have money owed to them, especially if they’re new to the prison sentence. The temptation is great and keeping them from crossing the line is where law enforcement has found the most challenges.

One serious recommendation that’s being considered is allowing the IRS to hold the refunds until third parties are able to legitimize the return. Employers who send in W2s is one way this can be accomplished. Also, annual reports of the nation’s biggest companies are often found in prison libraries. Those reports include federal tax identification numbers, which allows criminals already in prison the opportunity to claimed they worked for them on 1040 forms. By choosing the biggest companies, the prisoners assumed it would take the IRS quite some time before it would be able to verify the information. Finally, the IRS could potentially stop even more fraud by improving the accuracy of its Prisoner File. This is a master database that contains information such as inmate names, wages and Social Security numbers that’s collected from prisons. In a recent audit, it was discovered 500,000 files, or 18%, are potentially inaccurate or missing information.

David is a CPA and has spent the past decade as a financial adviser helping clients meet their fiscal objectives. With an appreciation for journalism, he has spent the past few years overseeing several financial columns as well as writing two previous finance blogs. He resides on the East Coast with his wife and two sons and has guided many through the recent recession while providing a no-nonsense approach to spending and saving. David on Google+

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