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The IRS will attempt to recover millions paid for fraudulent claims of tax credits, combat the growing problem of identity theft, and stop the payment of fraudulent refunds.

IRS Goes After Tax Credit Fraud and Identity Theft

  • 11/21/2012

IRS Goes After Tax Credit Fraud and Identity Theft

The IRS will attempt to recover millions of dollars paid for fraudulent claims of tax credits, according to a report by the Treasury Inspector General for Tax Administration (TIGTA). The TIGTA also cautioned that identity theft continues to grow, but reported that the IRS is combating the problem with new tools and is stopping the issuance of fraudulent refunds.

Comment: If a taxpayer receives a letter from the IRS that his or her return has been flagged for potential identity theft, the taxpayer must contact the agency personally (not the taxpayer’s representative), said Cindy Hockenberry of the National Association of Tax Professionals (NATP). Taxpayers have 75 days to respond to the IRS. The agency will ask them certain personal questions to verify their identity, Hockenberry explained.

Erroneous credits

TIGTA uncovered problems with the American Opportunity Tax Credit (AOTC) and nonbusiness energy property credits. The AOTC (an enhanced version of the HOPE education credit that is scheduled to sunset after 2012) offers a maximum of $2,500. Qualified taxpayers may be eligible for a partial refund of the AOTC.

TIGTA identified approximately 35,000 individuals who were younger than the typical age of individuals enrolled in a four-year college degree program or post-secondary vocational program eligible for the AOTC. Of the 35,000 individuals, 13,870 were age 10 and younger. According to TIGTA, approximately 110,000 taxpayers received a refundable AOTC for 2011, totaling more than $159 million for students who were unlikely to be enrolled in a four-year college degree program or vocational program. The IRS agreed to initiate a program to recover the $159 million paid in erroneous AOTC refunds.

The Code Sec. 25C nonbusiness energy property credit has also generated erroneous refunds, TIGTA discovered. According to TIGTA, the IRS has not developed processes to ensure that taxpayers do not claim more than the allowable maximum credit. Approximately 126,000 taxpayers have claimed more than the maximum amount, generating nearly $30 million in erroneous refunds. The IRS agreed to take steps to recover the erroneous payments of the credit.

Identity theft

Beginning with the 2012 filing season, the IRS implemented new filters to detect identity theft, TIGTA reported. Returns flagged by the new filters are held during processing until the IRS can verify the taxpayer’s identity. Once a taxpayer’s identity has been confirmed, the return is released for processing and any refund is issued.

TIGTA reported that as of April 28, 2012, the IRS had identified returns with a total of $6.4 billion claimed in fraudulent refunds. The IRS prevented the issuance of $6.1 billion of the fraudulent refunds.

2012 filing season

TIGTA also highlighted some statistics from the 2012 filing season. Approximately 111 million returns were filed electronically, accounting for 83.4 percent of all returns filed. The IRS received approximately 22 million returns on paper. TIGTA reported that paper returns declined by 14.1 percent from 2011. The number of returns prepared by practitioners increased 4.1 percent from 2011 to 2012, TIGTA found.

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