Every year about this time, I get emails asking, more or less, what happens when you lie on your tax return to get a refund.
There are the obvious answers… penalties, interest and depending on the severity, possible criminal prosecution. But there’s a lesser known potential consequence: having your return flagged as part of the Questionable Refund Program (QRP).
The QRP has been around since the 1970s. It was designed to identify fraudulent tax returns, to stop the payment of fraudulent tax refunds and to refer identified fraudulent tax refund schemes for criminal investigation.
There are a couple of ways that fraudulent refund schemes are detected. There are tips from financial institutions, return preparers and concerned citizens. Additionally, data matching by computer can help identify inconsistencies or clear cases of fraud. Tax returns that are considerable questionable are reviewed by IRS employees to identify potential fraud. As part of the review, the IRS may review prior year returns to see if there are any suspicious patterns; they generally also contact your employer and third parties to verify tax information. Of course, the review necessarily means that your tax refund is held.
The IRS touts the program as successful and offers examples on its website of QRP investigations, including this most recent one:
On March 2, 2011, in St. Louis, Mo., Mack Edwards was sentenced to 15 months in prison for a scheme to file false tax returns based on false W-2 forms for alleged workers of his construction company. According to court documents, between January 2008 and April 2008, Edwards and Hestine Mason, an income tax return preparer, participated in a scheme to file false 2007 income tax returns based on false W-2 forms from MD Construction, owned by Edwards. Edwards provided false W-2 forms to 12 taxpayers and instructed them to have their tax returns prepared by Mason to obtain a refund, and then share the refund with him. The W-2’s were false in that the named employee had not received the wages or made the withholding payments shown on the W-2’s. Edwards paid Mason $300 to $500 per return, some of which was paid to her out of the false income tax return refunds. Mason pleaded guilty and was sentenced to 12 months and one day in prison.
Outside of the IRS, the QRP has been the subject of much criticism. Specifically, allegations include that the program targets the poor and that delays in processing refunds are longer than necessary. In fact, in 2006, Taxpayer Advocate Nina Olson included the Questionable Refund Program in her annual list of the worst problems facing taxpayers. The IRS subsequently took steps to address some of Olson’s concerns but did not eliminate the program.
Questionable refund abuse is a logical and unfortunate consequence of the proliferation of tax credits. Personal tax credits such as EIC, additional child tax credit and other personal credits need to be abolished. The tax code should be about paying paying taxes and withholding and getting a refund from taxes paid. If poor people need help ( and many do) that help should come from other state and local programs. These programs hopefully would be less expensive to administer than a massive bureauracracy like the IRS.