Now that Americans finally know the tax rate they´ll be paying, it´s time to start thinking about the annual drudgery of filing their returns. It´s also the season when identity thieves begin ripping off those returns and stealing billions in false or misdirected refunds. Tax fraud, amazingly, is now the third-largest theft of federal funds after Medicare/Medicaid and unemployment-insurance fraud. Tax-identity theft exploded to more than 1.1 million cases in 2011 from 51,700 in 2008. The Treasury Inspector General for Tax Administration last summer reported discovering an additional 1.5 million potentially fraudulent 2011 tax refunds totaling in excess of $5.2 billion.
Spent a few weeks working at the IRS office nearby last year ... grunt work, opening envelopes and doing initial sorts on paper returns.
They had a little meeting talking about the fraud issues, many coming from foreign returns and those coming from South Florida and Puerto Rico (the latter get extra coverage).
Another big fraud area is in the area of the ETIN, although it wasn´t said in these terms what I remember was those undocumented workers would (1) file to get any tax withheld paid back and (2) take the ETIN (Earned Income Tax Credit).
Evidentally, our esteemed legislators wrote the law allowing us to pay the filer for dependents even if those dependents do not live in the United States (and of course, don´t have any SSN or identification). It´s a loophole that allows some of these folks to claim a dozen or more dependents and collect large refunds.
I can´t for the life of me understand the mind set of people who would cheat on their income tax. I have always instructed my CPA to err on the side of the gov´t because I am so afraid of the gov´t. My spouse had a legitimate home office for 22 years, and we never ever claimed it. I just don´t want to mess with it.
Refund threat is a HUGE problem and the IRS has been sending out notices to preparers about this for a while. They may need to make some improvements with how refunds are issued but they will.
Identity theft protection services have no mechanism for preventing this; they´re not affiliated with the IRS. They can keep someone from taking out loans and/or credit cards in your name but not from submitting a tax return in your name.
Guard your anything with your social security number on it and submit your tax return early. Also, it´s safest to do your own return (maybe using a software package) or to use the IRS´s Volunteer Income Tax Assistance (VITA), which is a free, safe tax return prep service available at many libraries.
Take comfort in the fact that the feds give out LONG prison sentences. Refund theft has their attention and electronic stuff leaves trails that are easy to follow.
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