IRS under fire for making taxpayer identity fraud a low priority

Internal Revenue Service managers “created an environment which discourages employees from detecting fraudulent applications” for taxpayer identification numbers, risking billions of dollars in improper tax refunds, auditors said.

None of the IRS’ subdivisions made detecting fraud a priority because doing so would eliminate some applications and maintaining a large inventory of applications provides job security, according to the Treasury Inspector General for Tax Administration.

The report prompted Rep. Charles Boustany Jr., R-La., chairman of the Ways and Means Subcommittee on Oversight, to write a letter to IRS Commissioner Doug Shulman demanding he identify which IRS manager made the decision to deemphasize the significance of errors in applications for taxpayer identification numbers. Boustany complained that “beyond training and employee incentives, IRS management has chosen to shut down processes and practices with proven success in identifying fraudulent [identification number] applications.”

Since 1996, the IRS has allowed taxpayers who are not eligible for Social Security to apply for a taxpayer identification number. In tax processing year 2011, the IRS handled more than 2.9 million such applications and made tax refunds of $6.8 billion.

In response to complaints from an unnamed U.S. senator and House member who heard from two internal whistleblowers, TIGTA reviewed the agency’s procedures for detecting fraud in ITIN applications. It concluded that IRS management has not established “adequate internal controls to detect and prevent the assignment of an ITIN to individuals submitting questionable applications” involving identity and foreign status, noted the report, dated June 16 but released Wednesday.

Interviews with IRS staff revealed that managers had “eliminated successful processes used to identify questionable ITIN application fraud patterns and schemes.” IRS management indicated that no function, including criminal investigation and the Accounts Management Taxpayer Assurance Program, “is interested in dealing with ITIN application fraud,” the auditors said.

Boustany’s letter underlined the IG’s examples of suspicious details in identification number applications: 154 mailing addresses were used 1,000 or more times; 10 individual addresses were used for filing 53,994 tax returns, resulting in the processing of $86.4 million in fraudulent refunds; 10 bank accounts received 23,560 tax refunds totaling more than $16 million; and a Michigan address where the IRS had previously rejected an ITIN application  went on to receive 640 separate refunds totaling $1.5 million.

“This report is shocking,” Boustany said in a statement. “It’s one thing if the IRS tries to catch fraud and fails, but it’s quite another when management apparently takes steps to weaken program integrity.”

IRS managers said they had investigated the schemes described in the report and taken some action. Of nine recommendations TIGTA made for creating new controls, the IRS, after reviewing a draft, agreed with seven and made plans for changes. The other two are still under consideration.