RALEIGH — As income-tax filing season for the 2013 tax year reaches its peak, billions of dollars in fraudulent refunds continue to flow to scam artists using stolen or fabricated identities and fake dependents to take advantage of a major loophole in the way the federal government issues refunds to individuals. The IRS says it is catching some of the perpetrators, but its enforcement efforts are hindered by political pressure to issue tax refunds before the agency can verify the identities of tax filers.
Officials from the North Carolina Department of Revenue say they are taking measures to catch the tax crimes, formally known as Stolen Identity Refund Fraud, but some flaws remain in the agency’s procedures dealing with SIRF. For example, NCDOR recently sent an interest income notice to a “taxpayer” in Durham several months after Carolina Journal notified NCDOR that the “taxpayer” did not live in Durham and her identity had been invented by fraudsters.
Fraud continues to get past tax authorities in other states as well. In March 2013, Sanford resident Martha Underwood found an envelope in her mailbox she said contained a state income tax refund check from Maryland. The envelope was addressed to the home on Westcott Circle where she and her husband had lived for five years, but the name of the addressee was Hispanic-sounding, and she did not know the addressee.
Underwood contacted CJ in January. She had read a CJ story about a Union County homeowner who had found in his mailbox an IRS check for $8,315 made out to Ray L. Rodriguez Morales. The street address was the homeowner’s, but Morales didn’t live there. That homeowner contacted CJ because he had also read earlier CJ stories about SIRF schemes.
Underwood said she did not open the envelope but kept it, trying to figure out what to do with it. A week later she wrote on the envelope: “This is fraud. Doesn’t live here.” She dropped it off at her local post office.
A few weeks later, she was working outdoors when she witnessed a late model van full of people stop at her neighbor’s mailbox. “Two men got out and went through the mailbox retrieving what appeared to be two items. They gave a victory shout and jumped back in the van. The driver burned rubber on the way out of my street,” she recalled. “I later asked my neighbor if she was missing any bills or other mail, and she said no.”
“I didn’t know anything about this until I read about it in Carolina Journal. If it is happening in Sanford, Durham and the other places you have documented, it is probably happening everywhere,” she said.
“Tax fraud is not just taking my address and someone else’s Social Security Number, it is theft of public money, of every taxpayer’s contribution to the well being of the state and nation,” she said.
The Treasury Inspector General for Tax Administration, an agency established to provide independent oversight of IRS activities, has issued a number of reports that address SIRF and related schemes.
The most recent one from September 2013 concluded, “expanded identity detection efforts are helping identify fraudulent tax returns. However, billions in potentially fraudulent refunds continue to be paid.” The report stated that for Tax Year 2011, TIGA determined that approximately 1.1 million undetected returns were filed using Social Security Numbers that have the same characteristics of IRS-confirmed identity theft tax returns. The potential fraudulent tax refunds issued totaled approximately $3.6 billion, down $1.6 billion compared to the $5.2 billion estimate for Tax Year 2010.
The report also concluded that the IRS stopped $7.9 billion in identity-related fraudulent refunds in 2011 and $12.1 billion in 2012.
The report reiterated the primary solution to preventing identity theft refunds from being issued: “Access to third-party income and withholding information is the key to enabling the IRS to prevent the continued issuance of billions of dollars in fraudulent tax refunds.“
In 2013, CJ reported on SIRF incidents in Durham and Clinton, N.C., as well as Long Island, N.Y. Many of the schemes involve checks addressed to Hispanic-sounding names. Some of the fraudsters who have been caught are in the United States illegally.
This type of fraud can be lucrative. In May, IRS special agents from North Carolina arrested a mother and daughter, both citizens of Honduras who were living in Clinton, in a SIRF scheme in which the pair obtained $1.4 million in fake refunds involving tax years 2006 through 2012.
Following an IRS undercover operation, Clinton residents Angela Christina Lainez-Flores, 44, and her daughter Karen Mejia, 23, pleaded guilty as charged in July in a conspiracy to defraud the federal government through the filing of false income tax refunds. Lainez–Flores also pleaded guilty to a separate charge of aggravated identity theft.
Lainez-Flores received a 30-month sentence and her daughter Mejia received an 18-month sentence. Lainez-Flores also was required to repay the government the $1.4 million she obtained fraudulently.
The typical scheme
The typical scheme works like this: The fraudster obtains a list of stolen Social Security Numbers and matching names, or obtains Individual Taxpayer Identification Numbers for persons who do not reside or work in the United States, or do not even exist.
The fraudster also obtains Employer Identification Numbers and matching employer names from another source. Then the fraudster files numerous phony tax returns under different names, claiming wages that never were earned. The returns often claim exemptions for children who do not exist. The phony returns typically ask for refunds ranging from $4,000 to $8,000.
Before filing the fake returns, some fraudsters have selected an individual address or a neighborhood as the locations for the refunds to be mailed. Others have rented mailboxes from the U.S. Postal Service or a private mail-delivery business for their refund checks. When the refund is expected to arrive, the fraudster will search through the designated mailboxes for the checks, or collect them from his rented box.
The fraudster will then take each check and a matching fake identification card with the same name and try to cash it at a bank or other check cashing facility. A cooperating tax preparer may be involved in the scheme and take a cut of the proceeds.
TIGA maintains that this type of fraud continues because the IRS says it is under pressure from Congress to mail refunds as quickly as possible. So the agency issues refund checks before it receives verification from employers that matches the earnings claimed by the fraudsters.
If the IRS had to hold refunds until employer records were matched to filer records, this form of fraud would be easier to detect and law enforcement officials could be alerted to the scam.
N.C. Department of Revenue spokesman Trevor Johnson said his department is aware of the numerous fraud schemes involving state and federal revenue agencies. He said the agency does not want to disclose its methods for detecting stolen or phony identities, because that might help the fraudsters discover new ways to perfect their craft.
“If an individual receives something in the mail from the N.C. Department of Revenue that does not appear correct, they should immediately contact the department,” he said. Johnson said that his agency has stopped $18 million in identity-related fraudulent refunds in calendar year 2013.
He said the department does not have an estimate of how many refunds were later determined to be fraudulent, or how many fraudulent refunds are never detected.
CJ‘s investigation of SIRF originated in March 2013. A Durham retiree concluded that the mailbox at his home on Sherron Road was being used as a drop site for fraudulent tax refunds and contacted CJ. Further reporting uncovered instances of fraud involving federal and state tax refunds being sent to the mailboxes of the retiree’s neighbors, along with schemes affecting residents of other North Carolina communities, Pennsylvania, and Long Island, N.Y.
The Pennsylvania case may have revealed a glitch in NCDOR’s enforcement procedures. On April 2, 2013, the Durham retiree found correspondence in his mailbox from the IRS office in Birmingham, Ala., addressed to a Jody A. Freed, and a separate envelope containing a $4,108.08 IRS tax refund check payable to Freed.
Two days later, the homeowner received a letter from the N.C. Department of Revenue addressed to a Jody Freed. It said the department could not process Freed’s return and that it must be resubmitted with W-2 and 1099 forms as well as a copy of Freed’s IRS tax return form. The document did not include Freed’s full Social Security number, only the last four digits.
CJ contacted a number of people named Jody Freed and located, in Slatington, Pa., a woman who said the last four digits of her Social Security number matched those in the North Carolina document. She said that, due to an injury, she qualified for and has been receiving federal disability benefits for the last few years, but has not filed a tax return because she was not required to do so.
While she has suffered no financial loss from the identity theft, she realizes she might encounter problems in the near future. “Didn’t the federal government know it is sending me disability checks under the Social Security number that it just issued a refund to?” she asked.
CJ contacted NCDOR about the Freed situation. At the time a spokesperson said the agency could not talk about an individual taxpayer’s situation, but said the agency took note of the apparent fraud.
In January, the Durham retiree again contacted CJ and said he had received another notice from NCDOR addressed to Jody A. Freed. CJ met the homeowner and retrieved the document. It was Form 1099-INT, stating that Freed needed to claim $595 in interest income on a state income tax refund she had received. The NCDOR pays 5 percent interest on refunds that are more than 45 days old. That amount indicates that her state refund would have been $11,900 and her total payment would have been $12,495.
CJ asked NCDOR’s Johnson why the department mailed such a notice to Freed at a Durham address it knew was part of a fraud scheme. After investigating the matter, Johnson said his department had stopped a refund check from being issued and that the interest-income statement should not have been sent. “It was an oversight,” he said.
Don Carrington is executive editor of Carolina Journal.