Defrauding IRS Could Get Even Easier

How many individual taxpayers would you expect to live at a single address? If you’ve got a big family, and a bunch of kids who are working, maybe you have a few returns being filed from your home. But what if you filed hundreds of separate returns from the same address? Wouldn’t you expect an IRS inspector to come knocking at your door?

Actually, you have a pretty good chance at getting away with it. The Treasury Inspector General for Tax Administration, who is in charge of monitoring the IRS, reported this week on a number of shocking cases of fraud missed by the agency.

The Inspector General took a look at fraudulent returns and applications for the Individual Taxpayer Identification Number (ITIN). In one case in Michigan, an address had initially been rejected for an ITIN. However, the agency eventually approved the number and then went on to issue 640 separate refunds totaling more than $1.5 million to that one single address. All told, the IRS could lose more than $21 billion over the next five years to similar fraud.

You would think an agency with such blatant fraud perpetrated against it would do everything it can to identify lawbreakers. Unfortunately, the Inspector General found that IRS management has actually created an environment that discourages tax examiners from questioning suspect applications. In fact, the agency eliminated a working group that was actively fighting against ITIN fraud.

From 2007 to 2010, the Questionable Identification Detection Team worked to identify some $43 million in fraud and uncovered thousands of questionable applications. Instead of giving a successful team more resources, IRS management shut down the unit saying that other programs would identify the same type of fraud.

Instead of picking up where the Questionable Identification Detection Team left off, other investigative units left cases hanging allowing fraud to continue. Seven schemes identified by the team continued to operate, collecting some $9 million in fraudulent refunds.

Clearly, the IRS is doing a poor job of stopping quite obvious forms of fraud. Detecting this type of fraud should be much easier than detecting problems within a single return. This isn’t a case where an individual is fudging how much money they made or how much they gave to charity. Shouldn’t there be giant red flags when a single home tries to file hundreds of returns?

All told, underpayment of taxes costs around $345 billion a year. The IRS only has the time and resources to examine about 1 percent of individual tax returns. I’ll admit, the IRS has a very big job.

The federal tax code has grown from some 400 pages in 1913 to more than 70,000 today. There are hundreds of millions of documents being filed with the IRS by individuals, businesses and non-profits across the country and across the globe.

The more complex the tax code gets, the easier it is to perpetrate fraud. The job of the IRS is now about to get vastly more complex. The President’s health care law will require the IRS to verify whether individuals and companies are purchasing government-approved health insurance. Those who fail to purchase the insurance will pay the new penalty that the Supreme Court recently declared a new tax.

The IRS is estimating that they will hire an additional 4,000 investigators to help enforce the new rules. The agency will spend $303 million to develop new systems to support Obamacare’s complex system of tax penalties and credits.

To put it frankly, there will be plenty of new ways to defraud the IRS in the coming years. Making the tax system more complex creates openings for criminals to get money that they don’t deserve.

We should be making our tax system simpler through reform. The House Republican budget, which I supported, calls for simplification of the tax code through the elimination of many of the lobbyist loopholes and special tax breaks that have built up over the years. If the code is simpler, then the IRS’s job of hunting down tax cheats will get easier and honest taxpaying Americans won’t see their hard-earned dollars end up in the hands of criminals.