IRS Identity Theft Issue

The IRS holds a special place in the American psyche. The concept of taxes and the taxman are widely despised by many Americans, even though the efficient collection of taxes is a key component of running a modern democracy. Even though the IRS is often cast as the bad guy, it is never cast as an inept one. In fact, far from it, the IRS is often portrayed as a powerful, all knowing, governmental entity that must never be cheated. If that is so, then why is Congress investigating widespread identity theft and tax fraud allowed by the IRS.

IRS Tax Fraud via Identity Theft

The legend goes a little something like this. An average American taxpayer files his income taxes. When he does so, he submits some documentation, but most of what goes on the typical tax form requires no documents actually be sent to the IRS. Rather, the taxpayer must keep those documents as proof, just in case the IRS comes asking via the dreaded tax audit.

Each year, the IRS audits something around one percent of all tax returns. Of that amount, a certain number are just randomly selected for review by a computer. Others, we are told, are flagged by a powerful computer algorithm that detects and flags suspicious items on a taxpayer’s return. If our above average taxpayer were to say fudge how much he donated to charity, or how much he paid for that business expense, the mighty IRS computers would notice, and the ensuing audit would be most unpleasant.

Recently, however, there have appeared to be some cracks in this concept of the IRS and its computing ability. It seems that there is a widespread problem where rings of crooks steal people’s identities and then file fraudulent tax returns in their name. The fraud isn’t subtle either. Returns showing $30,000 in income generate $25,000 refunds based on tens of thousands of dollars in charitable donations or other deductions. Furthermore, dozens or more of these fraudulent returns are filed from the same address. It’s enough to make one wonder, what exactly do those IRS programs check, if they can’t catch this obvious fraud?

Before you think this is license to run out and take a bunch of unsubstantiated deductions, think again. The reason these criminals steal identities to file these returns is because most of them are so egregious that they will eventually get flagged. Of course, by then, the thieves are long gone having cashed their refund checks months, or even years ago. For honest taxpayers, it does however suggest that you be sure to take all the deduction that you think you are entitled to. After all, if $20,000 in charitable deductions from someone earning $25,000 per year doesn’t set off any alarm bills, that new printer you bought for your business probably won’t either.

 

And now, it appears that the IRS internal security policies aren’t much better than those designed to catch tax cheats and identity theft.

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