Most Tax Refunds Do Not Involve Tax Fraud

On a national scale, the numbers on suspected tax fraud get a bit mind-boggling. Last year, the IRS said it identified about two million such cases.

Is criminal tax fraud really that common? Or does the IRS use fraud detection systems that are overly sensitive?

The high number of cases was confirmed in a recent report to Congress by the Taxpayer Advocate Service. The Taxpayer Advocate Service is an arm of the IRS that is supposed to help look out for the interests of taxpayers.

According to the report, about one million tax returns were flagged as potentially fraudulent by the agency’s fraud detection system.

Nearly one million more returns were automatically voided before they were processed. These returns were part of scheme known as “Operation Mass Mail.”

One reason the number of suspected tax fraud cases is so high is identity theft. Theft of Social Security numbers in order to use them to seek improper refunds is widespread. Indeed, the IRS says it has identified over 450,000 such cases in the last year.

A key challenge for the IRS is to not only pursue tax fraud aggressively, but also to enable honest taxpayers to obtain legitimate refunds without undue trouble and delay.

This means the IRS has dual pressures. As the Taxpayer Advocate Service said in its report: “[T]he IRS must somehow prevent refunds from going out on over two million bogus claims – and at the same time quickly process returns and issue refunds to the over 145 million individual taxpayers who file legitimate claims.”

In other words, the agency should not lose sight of its duties to ordinary taxpayers, despite the increase in suspected tax fraud cases.

Source: “IRS struggles to keep up amid surge in tax fraud,” CNN Money, Blake Ellis, 6-28-12