It is reported that the IRS tax refund scam is at an all time high costing the IRS and consumers billions of dollars. let’s explore what this means for the IRS and tax filers.
Let’s first assess the severity of the IRS tax refund scam, how it happens, why the tax refund fraud numbers are so high, and what could be done to prevent this rising and costly tax fraud scam. The reported annual tax refund fraud number impacting the IRS and consumers is around $5 billion dollars and the inspector general estimates the total tax refund fraud may be around $21 billion over the next five years. Looking at the limited details available to the public as reported in the news media, it appears that this criminal act is much more organized. The reason for this conclusion is that millions of dollars were paid out by the IRS to the same address or bank account through thousands of mailed checks or direct deposits. The estimated tax refund fraud of $5 billion per year or $21 billion over the next 5 years may not be a huge number when compared to the estimated tax gap which is hundreds of billions of dollars, however, in comparison, preventing tax refund fraud can be much more efficient and cost effective than traditional tax audits to collect taxes due. For one thing, a computer rule if properly configured would very easily flag and stop tax refund transactions which are sent to the same address or bank accounts unless we consider thousands of individuals living in the same household or owning a joint bank account as normal. On the flip side, IRS tax audits to collect taxes due are much more costly, timely and resource intensive.
Now let’s talk about what it means to the IRS and tax filers as this tax scam is not believed to slow down according to the inspector general. Although the government may have good reasons to believe that this IRS tax refund scam is not going to go away, I tend to think that this type of scam can be very easily and quickly prevented for the most part through improvements in the IRS’ fraud detection systems and proper employee education. This IRS tax refund scam which also affects tax filers who may be denied their tax refund because someone else used their social security number to file taxes before they did is really out of the tax filer's control and we are all the IRS’ mercy to fix this so that lengthy investigations do not delay our ability to collect our overpaid taxes. A couple of things that tax filers can do to avoid being victims of the IRS tax refund scam is to file their taxes as soon as possible before identity thieves do, and avoid paying excess taxes to be collected later. A careful examination of taxes due based on individual situations and proper reporting of tax withholding in the W4 form will further reduce the risk as tax credit amounts will decrease.