A blog post

The IRS Draws Congressional Attention

Posted on the 16 August, 2012 at 2:51 pm Written by in Taxes

The IRS itself has been in the news recently. Whether it is the ham-handed treatment of Section 501(c)(4) political/nonprofit groups or the shadow funding of ObamaCare, the agency has been drawing attention and criticism. Today we are going to talk about two recent studies requested by Charles Boustany (U.S. Rep – LA). He presently serves as the Chairman of the House and Ways Subcommittee on Oversight.

The first report is titled “There Are Billions of Dollars in Undetected Tax Refund Fraud Resulting From Identity Theft. It addresses identity theft, which has been the number one consumer complaint with the Federal Trade Commission for 12 consecutive years.

The IRS presently processes returns and issues refunds before receiving the information forms with which to crosscheck. For example, if someone receives his/her Form W-2 and files for a refund in January, the IRS is issuing that refund check before the underlying wage information has been received from the employer, much less integrated into IRS information systems. This weakness has been exploited and has become a virtual cottage industry in certain cities such as Tampa, Florida.

Consider what TIGTA discovered:

  • 2,137 returns resulting in $3.3 million in refunds were sent to one address in Lansing, Michigan
  • 518 returns resulting in $1.8 million in refunds were sent to one address in Tampa, Florida
  • 23,560 refunds totaling more than $16 million were issued to 10 bank accounts;  2,706 tax refunds totaling $7.3 million were issued to a single account

This is real money. TIGTA estimates that the IRS will issue almost $21 billion in identity-theft refunds over the next five years.

TIGTA made several recommendations, including:

  • Taking advantage of the information reporting available to the IRS. Social security benefit information, for example, is available in December – before filing season begins. Whereas this is a fraction of identity fraud, it is a positive step.
  • The IRS uses little of the data from its identity theft cases to develop patterns and trends which could be used to detect and prevent future tax fraud. Examples include whether the return was electronically or paper-filed, how the refund was issued, and, if issued by direct debit, the account number or debit card number receiving the refund.
  • Allow the IRS greater access to the National Directory of New Hires (NDNH). NDNH is a national database of newly-hired employees. It includes an employee’s name and address as well as wage information. By referencing information from prior year tax filings, the IRS could correlate NDNH data to determine whether reported wage reporting and claimed withholding appear fraudulent.
  • Encourage banks and work with federal agencies to ensure that direct deposit refunds are made only to an account in the taxpayer’s name.
  • Limit the number of tax refunds issued via direct deposit to the same bank account or debit card.

NOTE: That recommendation seems obvious.

 “Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications”

The second report is disturbing. IRS employees had contacted Congress directly about supervisor misconduct and potential fraud in a program that reviews and verifies individual taxpayer identification numbers (ITINs). Congress then called in TIGTA to investigate.

We should explain that an ITIN is an Individual Tax Identification Number. ITINs were started in 1996 as tax identification for individuals who may have U.S. tax filing requirements but are not eligible for social security.

How can this happen?

  • Consider a German businessperson who invests in and receives income from a Miami shopping mall
  • Consider a Nigerian graduate student attending the University of Missouri (many) years ago with yours truly
  • Consider my brother-in-law’s wife, who is English and married to a U.S. citizen 

An ITIN will allow one to open a bank account and file tax returns. For example, if one’s spouse is English and one lives in England, the spouse will need an ITIN to file a U.S. income tax return. The children – who possibly have never been to the U.S. – will need ITINs to be claimed as dependents on the U.S. income tax return.

OBSERVATION: This is one of the absurd consequences of the U.S. worldwide income tax regime. A U.S. citizen has to file tax returns, even if he/she has lived outside the U.S. for many years, has a family outside the U.S. and has no immediate plans of repatriating to the U.S.

When one finally obtains a green card, one can transfer work and wage information from the ITIN to the Social Security Administration.

One applies for an ITIN by filing a form (Form W-7) and attaching supporting documents to verify one’s identity and foreign status. A passport will satisfy both the identity and foreign status requirements. The IRS will otherwise accept a combination of documents, including a foreign driver’s license, a foreign birth certificate, a foreign voter’s registration, a visa or other IRS-listed documents. The process usually takes place through the mail, which means that no US-agency employee actually sees the person applying for the ITIN.

Unfortunately, ITINs have been swept-up in political battles. For example, there is fear that the IRS will share this information with Immigration, although the IRS is not permitted by law to do so. This may discourage people from obtaining ITINs, so the argument goes. On the other hand, there are states that will allow one to obtain a driver’s license solely with an ITIN, which seems a perversion of its intended purpose.

TIGTA goes into the IRS to investigate the complaints. Here are some of its findings:

  • IRS management is not concerned with addressing fraudulent applications in the ITIN Operations Department because of the job security that a large inventory of applications to process provides. Management is interested only in the volume of applications that can be processed, regardless of whether they are fraudulent.
  • IRS management has indicated that no function of the IRS, including Criminal Investigation or the Accounts Management Taxpayer Assurance Program, is interested in dealing with ITIN application fraud.
  • IRS management has:
    •  Created an environment which discourages tax examiners responsible for reviewing ITIN applications from identifying questionable applications.
    • Eliminated successful processes used to identify questionable ITIN application fraud patterns and schemes.
    • Established processes and procedures that are inadequate to verify each applicant’s identity and foreign status.

Good grief! The IRS disbanded an ITIN team that was having too much success, countered by provided virtually no training to new hires and transfers and put negative evaluations in overly-eager reviewers’ files.

TIGTA made nine recommendations in this report. The IRS agreed with seven and has already announced plans to implement interim changes. One has caused quite the consternation in the immigrant community by requiring copies of original documents with ITIN applications.

OBSERVATION: Let’s be fair here: would you be comfortable sending original copies of anything to the IRS? Assuming you can find that birth certificate from the mother country, how are you going to replace it when the IRS loses the thing?