Identity Theft and Tax Fraud

[Yardley CPA]

Article from AccountingToday:

 

Identity Theft and Tax Fraud

Washington, D.C. (September 22, 2014)

 

By Michael Cohn

The Internal Revenue Service is being urged to move up its W-2 filing deadline to January 31 and to lower the threshold for requiring electronic filing of W-2 returns in an effort to curb the growing trend of identity theft related tax fraud.

A new report from the Government Accountability Office suggested that additional actions such as these could help the IRS combat the threat of tax refund fraud. Based on a preliminary analysis, the IRS estimates it paid $5.2 billion in fraudulent identity theft refunds in the 2013 filing season, while preventing $24.2 billion in such refunds, based on what it could detect. The full extent of the fraudulent refunds is unknown, however, because of the challenges endemic in detecting identity theft-related refund fraud.

Identity theft-related refund fraud takes advantage of the IRS’s “look-back” compliance model, the GAO pointed out. Under this model, rather than holding refunds until completing all of its compliance checks, the IRS issues the tax refund after conducting selected reviews.

While there are no simple solutions, one option is earlier matching of employer-reported wage information to taxpayers’ returns before issuing tax refunds, the GAO noted. The IRS currently cannot do such matching because employers' wage data (from Form W-2s) are not available until months after the IRS issues most tax refunds. As a result, the IRS begins matching employer-reported W-2 data to tax returns in July, after tax season. But if the IRS had access to W-2 data earlier—through accelerated W-2 deadlines and increased electronic filing of W-2s—it could conduct pre-refund matching and identify discrepancies to prevent the issuance of billions in fraudulent refunds, according to the GAO report.

The Treasury Department proposed earlier this year that Congress accelerate W-2 deadlines to January 31. However, the IRS has not yet fully assessed the impacts of this proposal, the GAO noted, and without this assessment, Congress does not have the information it would need to determine the merits of such a significant change to W-2 deadlines or the use of pre-refund W-2 matching. Such an assessment is consistent with the IRS’s strategic plan, which calls for analytics-based decisions, and would help the IRS ensure effective use of resources, the GAO pointed out.

The Treasury Department has also requested authority to reduce the 250-return threshold for e-filing information returns. The Social Security Administration estimated that to meaningfully increase W-2 e-filing, the threshold would have to be lowered to include those filing five to 10 W-2s. In addition, the SSA estimated an administrative cost savings of about $0.50 per e-filed W-2. Based on these cost savings and the ancillary benefits they would provide in supporting the IRS’s efforts to conduct more pre-refund matching, a change in the e-filing threshold is warranted, according to the GAO. Without this change, some employers’ paper W-2s could not be available for IRS matching until much later in the year, due to the additional time needed to process paper forms.

The GAO recommended that Congress should consider providing the Treasury with the authority to lower the annual threshold for e-filing W-2s. In addition, the GAO suggested, the IRS should fully assess the costs and benefits of shifting W-2 deadlines and provide this information to Congress.

The IRS neither agreed nor disagreed with the GAO's recommendations, and stated it is determining how these potential corrective actions would align with its available resources and IRS priorities.

“The ability to narrow or close the gap between the time tax returns are filed and the time at which third-party information is available for use by the IRS is a concept with the potential to yield significant benefits to the government and to taxpayers, but can also impose burdens that must be quantified and carefully considered by policy makers,” wrote IRS deputy commissioner for services and enforcement John Dalrymple in response to the report. “Implementing such a change to the tax system would be a substantial undertaking, and we agree that the Congress needs to have a well-informed understanding of the costs and benefits in order to determine the best course of action.”

[kcjenkins]

While that would reduce theft through bogus W-2s, it would just divert the crooks into more bogus EIC claims, Ed credit, itemized deductions, etc.  And Sch C crime, of course.   Sending more crooked FILERS to jail, as well as the preparers, would do more.  Most of the time, the FILERS are treated as innocent victims.  

[Gail in Virginia]

And shortening the amount of time that preparers have to get W-2s filed is only going to result in more corrected W2s IMHO.  We already have to have them done and out by the end of January for the employees, but we typically hold the copy for SSA for about 15 days in case the employee notices an error in his social security number or address.  (He could have noticed it on his paycheck all year long, but of course they don't look at that except to cash it.) 

[michaelmars]

since we need the December bank stmt to tie out the numbers we will only have about 2 weeks to get all w-2's done

[Jack from Ohio]

since we need the December bank stmt to tie out the numbers we will only have about 2 weeks to get all w-2's done

I do not use bank statements to create and file W-2s.  Not sure why I would need that information?

[jklcpa]

I do not use bank statements to create and file W-2s.  Not sure why I would need that information?

 

Reconciling the bank accounts helps ensure that the client has recorded the payroll properly in the subsidiary records or journals, and also that the payments of liabilities have been recorded at the actual amounts paid. If you are doing the bookkeeping, that should be part of the process. If you aren't doing the bookkeeping, you should ask if the client is reconciling the bank accounts, otherwise, how do you know if the transactions are recorded in the proper period and at the proper amounts.

[redux]

Caught

 

http://www.providencejournal.com/news/courts/20140926-cranston-tax-preparers-charged-with-fraud-after-returns-filed-falsely-claiming-dependents.ece

[joanmcq]

While that would reduce theft through bogus W-2s, it would just divert the crooks into more bogus EIC claims, Ed credit, itemized deductions, etc.  And Sch C crime, of course.   Sending more crooked FILERS to jail, as well as the preparers, would do more.  Most of the time, the FILERS are treated as innocent victims.

A big part of the ID theft that's been going on in the last few years has been creating fake W2s to create a fake EIC return. This would nip that fraud if pre-matching can be done. Canada pre-matches wage info before issuing refunds. Why can't the US do it?

[Jack from Ohio]

A big part of the ID theft that's been going on in the last few years has been creating fake W2s to create a fake EIC return. This would nip that fraud if pre-matching can be done. Canada pre-matches wage info before issuing refunds. Why can't the US do it?

Because Americans have become addicted to having Uncle Sam save money for them, then they spend the money at Christmas or early January, and expect to get their refunds in a few days to pay the bills they have racked up. We hear it all the time... "I need that money to pay.. ________ .(fill in the blank with most anything you can imagine)

Financial and budget responsibility is non-existent in 85% (I may be generous there) of the American public.

Until those two issues go away, Congress will not do the things necessary to reduce the ease of which fraudsters can steal money. Refunds should be delayed until at least May 1, to allow matching and checking. However, the vast majority of Americans would never stand for it. Hence US taxpayers lose Millions each year.

[kcjenkins]

A big part of the ID theft that's been going on in the last few years has been creating fake W2s to create a fake EIC return. This would nip that fraud if pre-matching can be done. Canada pre-matches wage info before issuing refunds. Why can't the US do it?

Agreed.  BUT it can be done through a Sch C which has no matching.  I favor W-2 matching, don't misunderstand me.  And putting bogus preparers in Fed prison,  But until they also put more of the filers in there too, it will continue, because there are many ways to do it, and it pays so well.  And the filers play innocent, blame the preparers, and mostly get off with fines at the most.

[bertrans]

Because Americans have become addicted to having Uncle Sam save money for them, then they spend the money at Christmas or early January, and expect to get their refunds in a few days to pay the bills they have racked up. We hear it all the time... "I need that money to pay.. ________ .(fill in the blank with most anything you can imagine)

Financial and budget responsibility is non-existent in 85% (I may be generous there) of the American public.

Until those two issues go away, Congress will not do the things necessary to reduce the ease of which fraudsters can steal money. Refunds should be delayed until at least May 1, to allow matching and checking. However, the vast majority of Americans would never stand for it. Hence US taxpayers lose Millions each year.

At some point in the last 25 years, somehow, the federal tax return ceased, largely, being perceived as a vehicle for remitting taxes, and became viewed and understood as a vehicle for the mysterious delivery of money to filers.