It’s March 29, do you know where your refund is?
It’s possible that it’s in someone else’s mailbox. Thieves are becoming more sophisticated these days with the Internal Revenue Service (IRS) posting “identity theft” and “phishing” at the top of the list for Dirty Dozen Tax Scams of 2012. Increasingly, dishonest persons are using information gleaned from stolen financials, internet scams, and phishing schemes to empty bank accounts and file fraudulent tax returns in order to snag bogus refunds.
During tax season, these efforts are on the rise with the IRS reporting that, as of March 9, 2012, they had stopped 215,000 questionable returns with $1.15 billion in claimed refunds from filters specifically targeting refund fraud. (report downloads as a pdf). And it’s not just small-time crooks and thieves: some so-called “boiler room” operations are on a massive scale. As a result, you need to take steps to protect yourself and your valuable financial information.
Even the most diligent taxpayers can’t completely stop the professionals, however. That’s why IRS is considering taking the bold steps of sharing information with the police in order to stem the tide of tax refund fraud and identity theft, beginning in Tampa, Florida.
Fraud is especially rampant in Tampa with damages from stolen Social Security numbers and financials topping $130 million in 2011 alone. Detective Sal Augeri, Tampa Police Department, emphasized the size of the problem in his testimony to the Senate Finance Committee (downloads as a pdf), saying:
“The tax refund fraud scams mirrors the spread of crack cocaine here in Tampa.”
That’s why, in what’s considered a groundbreaking move, the IRS is considering a pilot program in Tampa that would allow the IRS to work together with the police in instances of suspected fraud. While this seems like a no-brainer, it may actually be illegal under current law. Augeri stressed this in his testimony, noting, “As you are aware, tax code prevents the IRS from sharing information with local law enforcement.”
Believe it or not, prior to 1977, taxpayer information was considered public record and the rules regarding disclosure were left to the Executive branch (report downloads as a pdf). That caused concern about the dissemination of taxpayer information for nontax purposes. Congress took matters into its own hands in 1976 and revised Section 6103 of the Tax Code, eliminating Executive discretion.
Now, under the current Tax Code, Section 6103 limits disclosure of taxpayer information except under specific circumstances. At Section 6103(i)(2), disclosure is authorized in response to requests from federal agencies for use in criminal investigations. There appears to be no corresponding exception in IRC §6103 that allows for the release of identity theft information to state or local agencies, leading Steven Miller of the IRS to remark, “We are limited in what we can supply to local law enforcement.”
Augeri echoed this frustration, noting that in September of 2011, a targeted effort led to 47 arrests for identity theft and credit card fraud. During the arrests, several cars were seized, including a Mercedes, Jaguar, BMW, and a Bentley Rolls Royce. Despite the arrests and seizures, there have been no federal indictments for tax fraud. More disturbing, adds Augeri, is that none of those arrested appeared to have slowed their tax fraud activities.
Senator Bill Nelson (D-FL) wants to change that. Nelson held a hearing at the Senate Finance Committee to tout his proposed legislation, the Identity Theft and Tax Fraud Prevention Act, to allow, among other things, more taxpayer information sharing between the IRS and local law enforcement. Seizing on a point made by Augeri, Nelson said about the increasing problem of identity theft (testimony downloads as a pdf), “People describe it as cocaine on a card.” His legislation would, he touted, protect taxpayers from an expanding identity theft crisis.
Some worry, however, that changing the safeguards currently in place might do more harm than good. Nina Olson, the National Taxpayer Advocate, cautioned that once local law enforcement has access to taxpayers’ returns, they could be shared with other people (testimony downloads as a pdf). She suggested that, “[i]f we place a greater value on protecting taxpayers against identity theft and the Treasury against fraudulent refund claims, we may need to make a substantial shift in the way the IRS does business. Specifically, we may need to ask all taxpayers to wait longer to receive their tax refunds, or we may need to increase IRS staffing significantly.”
Considering that Congress just slashed the IRS’ budget, I’m guessing we can rule the last bit out. And forcing taxpayers to wait longer for refunds? I can only imagine the backlash.
Realistically, I think that some level of cooperation between local law enforcement agencies and IRS is going to have to continue in order to stop identity theft and tax fraud, giving up what was until now sacrosanct taxpayer privacy in order to protect taxpayers. Is it worth it?