Author photo

Carolina Journal News Reports

Stolen Identity Tax Refund Fraud Widespread

Durham scheme reaches several states, also federal returns

Apr. 29th, 2013
More |

DURHAM — A stolen-identity tax refund scheme uncovered by a Durham retiree in March apparently is so widespread that one federal official has described it as the “No. 1 tax scam for 2013.”

It’s called SIRF, stolen identity refund fraud, and it affects an untold number of innocent taxpayers, costing the federal government billions. It relies on two weaknesses in the operations of the Internal Revenue Service: its desire to get returns to taxpayers quickly, and a timing gap in how it deals with employees and employers.

In short, criminals file fake tax returns in the name of a taxpayer, but do it before the real taxpayer gets around to it. Then, the IRS, in an effort to provide good service, sends a refund check to the criminal before it learns from employers if the refund actually is warranted.

As reported at Carolina Journal Online in March, and in Carolina Journal’s April print edition, a Durham retiree found that his mailbox was being used as a drop box for people engaged in tax fraud. He had received tax refund checks from Maryland and tax correspondence from the state of South Carolina.

It turns out that this was not an isolated incident. Since the earlier stories by CJ, the Durham retiree has received more tax mailings, including a federal tax refund check for $4,000 made out to someone who doesn’t live at his address. Additionally, two neighbors have reported receiving tax correspondence and checks to people who do not live at their addresses.

Stolen identity refund fraud is so rampant that J. Russell George, Treasury inspector general for tax administration, dubbed it 2013’s “No. 1 tax scam.” However, it has been going on for some time.

George said that for tax year 2010 the IRS processed 1.5 million undetected stolen identity returns, representing a $5.2 billion loss to U.S. taxpayers. In tax year 2011, more than 641,000 individuals were victims of identity theft by criminals using their identities to get fraudulent tax refunds, the IRS estimates. For tax year 2012, that figure was estimated at 1.2 million.

Those committing this kind of fraud are brazen. For instance, someone filed 2,137 tax returns to the IRS in 2010 and used the same return address in Lansing, Mich. The illegal take from those returns totaled $3,316,051, according to the IRS.

That was not the only address to which hundreds of fraudulently obtained IRS refund checks were sent. Some 765 similar refunds went to the same address in Chicago (totaling $903,084), and 741 to the same address in Belle Glade, Fla. (totaling $1,004,897).

The magnitude of stolen identity fraud affecting the North Carolina Department of Revenue is unclear.

Why thieves are successful

Government officials say their challenge is to find a balance between customer service and system integrity. Officials say they want to issue refunds quickly to satisfy tax filers, but those efforts preclude a thorough examination of tax returns to prevent fraudulent refund checks from being issued.

“Stolen identity refund fraud, or SIRF, can be described all-too-simply as a series of crimes by which criminals steal Social Security numbers, file tax returns showing a false refund claim, and then have the refunds electronically deposited to a bank account or to prepaid debit cards, or sent to an address where the wrongdoer then can get access to the refunds,” Assistant U. S. Attorney General Kathryn Keneally told the U.S. Senate’s Special Committee on Aging April 10.

How to prevent it

Based on testimony provided to two Senate committees, officials seem to be focusing on three things they can do to prevent this type of refund identity fraud.

The first would require the IRS to process W-2 forms and other information from employers before it processes individuals’ tax returns and issues refunds.

Employers now have until March 31 to file W-2 forms with the IRS, but taxpayers can begin filing returns as early as mid-January. SIRF criminals understand they have a window of opportunity to submit fraudulent returns before tax authorities receive W-2s from employers. Because of this timing, identity thieves can receive fake refunds before tax officials have any idea they’ve been scammed.

Second, the IRS could implement a real-time tax system to verify many elements of a return when it is filed. The IRS now uses what it calls an “after-the-fact approach to compliance,” dealing with concerns weeks or even months after refunds have been mailed. Among other potential problems, a real-time tax system could flag addresses from which multiple returns have been filed.

Third, the IRS could take better care of victims. National Taxpayer Advocate Nina Olson, whose job it is to provide an independent voice for taxpayers, and who does not represent the views of the IRS or other federal agencies, told the committee on aging that “victims often have to wait in excess of six months to have their cases resolved and receive their refunds.”

Because of inefficiency, she told the committee, “Too many victims to fall between the cracks of IRS bureaucracy.”

Durham scheme

When the retired Durham resident received several pieces of mail from government agencies addressed to different individuals at his home on Sherron Road, and saw unfamiliar people checking mailboxes on his street, he concluded someone was using his address in a tax refund fraud scheme.

He shared copies of the documents with CJ and turned over all correspondence and checks to federal authorities.

After CJ’s initial meeting with the homeowner, two neighbors told him they also had received similar mailings. CJ interviewed the neighbors and concluded that the three households had received 17 official mailings addressed to people who didn’t live at those addresses.

The mailings were sent from the IRS and the state revenue departments of Maryland, South Carolina, and North Carolina. The mailings included refund checks from Maryland for $1,651 made out to Sherry D. Arozarena, and another for $1,746 made out to Jessica B. Fonseca. Also, there was a $4,108.08 check from the IRS payable to Jody A. Freed.

It is not known if Durham scheme involves other addresses and stolen identities, or whether the perpetrators may have recovered several other checks undetected before the homeowners retrieved their mail.

A national problem

The seriousness of the problem prompted the U.S. Senate’s committee on aging to hold a hearing on SIRF issues April 10, and the Senate Committee on Finance to hold one the issue on April 16.

George, the Treasury inspector general for tax administration, said an audit conducted by his office identified more than 76,000 tax returns for the year 2010 that were filed using the identities of senior citizens that had characteristics of an IRS-confirmed identity theft case.

“Those returns resulted in potentially fraudulent tax refunds totaling over $374 million.” He explained that the identities of senior citizens are targets for identity theft because many are not required to file a tax return. The IRS is unaware of the fraud until a legitimate taxpayer also files a return using the same name and Social Security Number.

The IRS and other law enforcement agencies have uncovered a number of SIRF operations. For example, a February press release from the U.S. Attorney’s office in the northern district of Georgia reported that Kevin Joseph Sonnier, 44, of Ellenwood, Ga., and Bernardo Davis, 26, of Morrow, Ga., were arrested and charged with wire fraud, aggravated identity theft, and conspiracy to defraud the government. Sonnier and Davis are accused of filing more than 15,000 false tax returns from 2011 and 2012 that claimed more than $15 million in fraudulent refunds.

“They obtained some of these names and Social Security numbers through the use of a website and advertisements that touted the availability of an ‘Obama stimulus payment’ and provided a toll-free number. However, no stimulus payment actually existed, and Sonnier and Davis instead used the victim’s personal information to file thousands of false tax returns that claimed millions of dollars in bogus refunds,” stated the release.

Refund fraud in North Carolina

N.C. Department of Revenue director of business operations Cale Johnson said the department does not track identity theft statistics and it doesn’t know how much money the state loses to SIRF. He also noted that the department does not have the statutory authority to bring charges related to identity theft.

He said the department saved more than $19 million last year as a result of just one of the anti-fraud initiatives encompassing SIRF-related activities.

Regarding multiple, and thus likely fraudulent refunds being sent to the same address, he said, “The department does monitor and seeks to identify and prevent multiple fraudulent refunds from being issued to the same address. By utilizing a variety of different methodologies, the department is able to reduce the number of fraudulent refunds from being issues.”

Don Carrington is executive editor of Carolina Journal.