Identity Theft Increases In Electronically Filed Returns

This tax season, the Internal Revenue Service (IRS) flagged nearly 1.1M returns as potentially being fraudulent examples of identity theft. The associated refunds were in excess of $6.3B.

The number of fraudulently filed returns has done nothing but increase since the phenomenon of electronic filing began. As of March 2nd of this year, over 12K were confirmed as being fraudulent. That number was only a little over 9K on the same date last year.

Tax related identity theft began with electronic filing in the 2004 – 2005 filing season and has only gotten worse over the years. Criminals file fraudulent returns with your name and social security number electronically, bumping up the portions of the return necessary to increase a refund that goes into their account.

Once a refund is paid, the real taxpayer has a problem. When they file the actual return, it’s rejected. At that point you need to go through a six month process of filing forms that look like the Old Testament, in order to convince the Service that you are who you are, and actually deserve the refund in question.

The fact that the Service was actually able to stop over a million potentially fraudulent returns is only a drop in the bucket. The IRS no longer sends out actual numbers on identity theft, but the last published number put it at almost 5% of all electronically filed returns.

If that percentage still held up, the actual number of identity theft returns would be somewhere north of 7.6M.

If you’re one of my clients, you know that I frown on electronic filing for several reasons, and identity theft is just one of them. Sending all of that data through cyberspace makes it easy to collect and replicate.

I’ve never had a return that was filed on paper replicated for identity theft purposes. Never.

Let me leave you with this.

The IRS is launching a pilot program for a government run, online tax filing system that’s free for all. The Service spent nine months studying whether or not taxpayers actually wanted this system.

Imagine how much money they spent determining if people actually wanted something for free.

Given your economic status, the government already has free software if you qualify. This pilot program would be complimentary for all, regardless of income status.

I can honestly say that I’m horrified.

That’s not because I think it’ll hurt my business. Anyone with a return so simple they’d try to do it themselves will probably never become one of my customers.

It’s the concept of using software to do something that could potentially put you in the slammer with three hots and a cot that truly horrifies. Without question, the worst tax work I’ve ever seen has been done by individuals using TurboTax.

The machine asks you questions. You answer to the best of your ability and it spits out a return.

Since most people don’t know what they’re looking at in the first place, many times it’s absolutely wrong. Two of the nastiest audits I’ve handled in the past five years were people who screwed up their individual returns.

One of these was a situation so abhorrent, that the Service was pushing for jail time. The client in question was a 64 year-old widow.

The other part that’s ridiculous is the fact that when you do your own return, you’re forced to police yourself.

Fifteen years ago, the Service did another study where they tested why individuals cheated when doing their returns. They learned that most taxpayers have a “sweet spot” they aim for on a refund.

Let’s explain their findings by using an example and say that the family in question had a sweet spot of $5K, so that they could take their kids to Florida every year for a summer vacation.

The Service secretly watched individuals doing their returns using TurboTax. The individuals looked at the little box in the right hand corner of the screen that showed their refund.

If it didn’t hit that “sweet spot” given tax rule changes, they bumped up charitable donations or whatever else they needed to get to that $5K refund. They actually feared the IRS less than their spouse whining about not going to Florida.

This is yet another one of the reasons why individually prepared returns are audited five times more often then professionally prepared ones.

No one should ever be forced to police themselves. And with this new pilot program, the Service is going to make it even easier for people to prepare fraudulent income tax returns.

They’re probably only doing this so they can audit more and charge additional penalties and interest. It took them a whole nine months to figure out how much more money they’d receive in additional tax revenues.

I’m absolutely horrified.

We’re all going to get through this. Let’s get through it together.

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Chris Amundson
Accounting Solutions Ltd.

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Chris Amundson
Accounting Solutions Ltd.

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