In 2011, the IRS reports, it stopped more than $1.4 billion in ID theft refunds from reaching suspected criminals and identified more than 260,000 fraudulent returns involving identity theft. That’s a huge jump from 2010, when the agency reported stopping $247 million in bogus refunds and 49,000 fraudulent returns.
In January, the IRS and the Justice Department announced a nationwide crackdown targeting 105 people in 23 states allegedly involved in identity theft and tax refund fraud. Federal investigators are also eyeing 150 money service businesses and auditing 250 check-cashing businesses that the IRS says may “knowingly or unknowingly” be facilitating refund fraud.
More recently, the IRS charged a high school student in Louisiana with tax fraud after she was found with the Social Security numbers, addresses and birthdates of 189 classmates.
A broken system?
But in its latest report to Congress, the Taxpayer Advocate Service (TAS), an independent organization within the IRS, said that there are “over 50 gaps in IRS procedures” to adequately prevent, detect and resolve this crime.
“The system is definitely broken because the [privacy] laws on the books are designed to protect the taxpayer,” says Laura McElroy of the Tampa Police Department, which is playing a lead role in police efforts to combat tax ID theft. “But with the advent of e-filing, those laws now protect the criminals. As we’re investigating, the hands of the IRS are tied because it can’t provide us with taxpayer information.”
Tampa police began a six-month investigation after noticing that the illicit drug trade was waning. Traffic stops of known or suspected dealers were turning up not crack cocaine but "massive amounts" of preloaded debit cards, ledgers and laptop computers used to e-file fraudulent returns.
Investigators eventually found that identity theft instructors had been teaching weekly classes to up to 100 people, some of them drug dealers, on how to steal identities.
“Criminals find insider ‘moles’ who work at a corporation,” says McElroy. “For $200, they can buy the names, SSNs and birthdates of 10 victims from moles who can, and do, work at places that cater to an aging population, such as a medical facility.”
A sting by Tampa police, the U.S. Postal Inspection Service and other agencies brought the arrest of 49 alleged tax-related identity thieves. In addition, the USPIS intercepted some $100 million in mailed bogus tax refunds before they reached scammers.
Finding victims, living or dead
In this type of identity theft, anyone is at risk. But the dead are special targets – with help from Uncle Sam. The Social Security Death Master File, available online, is another way that crooks can get everything needed for a fraudulent e-filed tax return.
Consider the case of Craig Steven Jarrell, who died unexpectedly at age 49 on Jan. 2, 2011. Two months later, his grief-stricken mother – AARP member Leah White, 70 – tried to e-file his 2010 return. “But it was rejected at the IRS website,” she says.
The reason: On Feb. 1 – just a few weeks after Jarrell’s obituary was published online – a scammer in Florida filed a fraudulent tax return under his identity. About a week later, a $1,500 refund for Jarrell was direct-deposited into a bank account in Boca Raton.
“My son lived here in Michigan and never even visited Florida, but a deposit was made into a bank account there in just a few days, no questions asked,” White told Scam Alert. “But even after the IRS confirmed the fraud, I still had to provide his birth certificate, death certificate and go through all kinds of rigamarole to finally get his refund check.”
Jarrell’s actual amount of $432 finally reached her in December.
In all likelihood, the Florida scammer might have happened upon Jarrell’s obit and then gleaned his personal data from the SSA’s Master Death File.
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Sid Kirchheimer writes about scams and consumer issues.
Published February 6, 2012