The Internal Revenue Service estimates that ID thieves who filed fraudulent tax returns pocketed more than $5 million last year and could steal up to $21 billion over the next five years, Treasury Department investigators reported last week.
While the IRS detected an estimated 940,000 fraudulent returns for last year claiming $6.5 billion in refunds, there were potentially up to 1.5 million undetected cases of thieves seeking refunds after assuming the identity of a dead person, child or someone else who normally wouldn't file a tax return.
"We found multiple reasons for the IRS's inability to detect billions of dollars in fraud," said J. Russell George, the Treasury Department's inspector general for tax administration, in a statement. "At a time when every dollar counts, these results are extremely troubling."
The government audit warned the problem could undermine public trust in the U.S. tax system.
Thieves also are exploiting vulnerabilities in the way the IRS delivers refunds, investigators found. Of the 1.5 million undetected cases of potential fraud, 1.2 million used direct deposits, including pre-loaded debit cards. Thieves often prefer those methods to a paper check, which require a physical address to receive the check and photo ID matching the taxpayer's name to cash it.
In one example, investigators found a single address in Lansing, Mich., that was used to file 2,137 separate tax returns. The IRS issued more than $3.3 million in refunds to that address. Three addresses in Florida filed more than 500 returns totaling more than $1 million in refunds for each address.
The IRS said it is already putting a number of new measures in place, including new ID theft screening filters that will hold on to refunds until the IRS can verify a taxpayer's identity. That filter had thwarted about $1.3 billion in potentially fraudulent refunds through April, the audit said. Another system flags returns filed with Social Security numbers of those who have died.