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The Latest IRS Failure: Officials Pay Out $5.2 Billion in Fake Identity Theft Refunds


"[T]he IRS received over 2,000 returns from a single address..."

WASHINGTON, DC - SEPTEMBER 17: Internal Revenue Service Commissioner John Koskinen (C) testifies before the House Oversight and Government Reform's Economic Growth, Job Creation, and Regulatory Affairs Subcommittee in the Rayburn House Office Building on Capitol Hill September 17, 2014 in Washington, DC. The Oversight and Government Reform Committee continues to investigate the IRS for targeting political groups applying for tax-exempt status for intensive scrutiny based on their names or political themes. Chip Somodevilla/Getty Images

The Government Accountability Office reported Monday that the IRS paid out an estimated $5.2 billion in refunds in 2013 — to people who weren't entitled to that money.

The cash was paid out to people who claimed they were victims of identify theft, or IDT, but GAO says those were fraudulent claims. GAO did say the IRS was able to stop $24.2 billion worth of these fraudulent claims, but said it's unclear how much fraud was attempted because of "the challenges inherent in detecting IDT refund fraud."

The IRS, led by commissioner John Koskinen, paid out $5.2 billion in fake identity theft refund claims in 2013. Chip Somodevilla/Getty Images

As difficult as it is to detect, GAO found one glaring problem that could dramatically cut down on IDT theft.

According to GAO, the IRS processes most IDT claims well before it starts receiving any W-2 forms from companies. The report said being able to match the wage information that people report with the W-2 forms that companies file could help the IRS boost its detection of fraudulent claims.

Specifically, GAO said the IRS has already processed about 60 percent of refunds before it has received any W-2 forms.

GAO blamed the IRS for the failure. The report noted that earlier this year, the Department of Treasury recommended that Congress move up the deadlines by which W-2 forms must be filed.

But it also said the IRS hasn't assessed the impact of this change. "Without this assessment, Congress does not have the information needed to deliberate the merits of such a significant change to W-2 deadlines or the use of pre-refund W-2 matching.

GAO recommended that the IRS quickly assess the costs and benefits of requiring earlier filings of W-2 forms, and to get this information to Congress. It also recommended that Congress then act to move up the deadline for filing W-2 forms.

Republicans and Democrats in the House and Senate pounced on the report as another example of how the IRS has to get its act together.

"In one case, the IRS received over 2,000 returns from a single address – paying out over $3.3 million in refunds," said House Ways & Means Committee Chairman Dave Camp (R-Mich.). "That is not just a simple error, that is clear mismanagement."

"By the time IRS matches all of the payroll information it collects with the tax returns it receives, billions of dollars in fraudulent refunds have already been sent out the door," said Senate Finance Committee Chairman Ron Wyden (D-Ore.). "This is a serious and unacceptable issue that must be addressed now."

The members said IDT refund fraud happens with someone files a fake tax return with a stolen Social Security number.

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