Some U.S. banks awash in ID theft tax-fraud proceeds as IRS cracks down

February 3, 2012

By Brett Wolf

NEW YORK, Feb. 3 (Thomson Reuters Accelus) – Despite a new federal crackdown announced this week aimed at combating tax refund fraud involving the use of stolen identities, current law enforcement efforts are not enough and fraudsters are still pumping massive sums of tax fraud proceeds through U.S. banks, sources told Thomson Reuters.

“IRS and Justice should have been doing this three years ago. This widespread criminal activity is more profitable than drug dealing,” said regulatory consultant and investigator Jim Dowling, a former Internal Revenue Service criminal investigator special agent who also acted as an anti-money laundering (AML) advisor to the Office of National Drug Control Policy. The Internal Revenue Service this week said that in late January it worked with the Justice Department’s Tax Division and U.S. Attorneys’ offices across the country to target more than 100 people in 23 states suspected of involvement in the theft of thousands of identities and taxpayer refunds. The resulting indictments, arrests and raids were reportedly the result of investigations that had been underway for months or years.

Identity-theft tax fraud schemes typically involve using an unwitting victim’s name, social security number and date of birth to file an online tax return in his or her name and routing the resulting IRS refund payment to an untraceable bank account. The IRS says it has stepped-up its internal reviews, including by designing new identity-theft-screening filters, to spot such scams before refunds are issued.

IRS Bank Secrecy Act compliance examiners and criminal investigators have also reportedly paid hundreds of visits to check-cashing businesses of late “to help ensure these check-cashing facilities aren’t facilitating refund fraud and identity theft.” The visits took place in nine “high-risk” areas in and around Atlanta, Chicago, Los Angeles, Miami, New York, Phoenix, Tampa, Washington, D.C., and Birmingham, Alabama, according to the IRS.

“This unprecedented effort against identity theft sends a strong, unmistakable message to anyone considering participating in a refund fraud scheme this tax season,” said IRS Commissioner Doug Shulman. “We are aggressively pursuing cases … and people will be going to jail.”

“Too little, too late”

Dowling said that the recent IRS and Justice Department efforts are “too little, to late.” Identity theft-related tax fraud has grown so pervasive in the criminal world that rap songs have been written containing lyrics about it and some banks are inundated with related crime proceeds.

Dowling said criminals know that if they file tax returns electronically on a certain day of the week the IRS will send out the refunds without verifying the legitimacy of the filing regardless of how much money is involved. He would not name the day for worry that he might inform criminals who do not already have the information.

Kirk Nahra, a lawyer with Washington-based law firm Wiley Rein LLP who has expertise in privacy issues, said the IRS-driven expansion of electronic tax filing may have contributed to the growth of identity theft-related tax fraud. He said the government must find a way to balance ease-of-use considerations with security controls.

“The government has encouraged electronic filing, but anytime you have something that is easy to use, quick and fast, that is a recipe for a problem,” he said.

Fraudsters usually choose to have IRS refunds sent to bank accounts opened with stolen identities for direct deposit, Dowling said. Once the tax fraud proceeds are in the bank accounts, they are withdrawn as cash or cashier’s checks. The cashier’s checks are then negotiated at check-cashing businesses and the thoroughly laundered currency is loaded onto prepaid cards.

“The check-casher calls the bank, the bank says they are good checks, so the check-casher cashes them and the money is gone and completely untraceable. Depending on what city you are in, if you keep the fraud below several hundred thousand dollars, the government isn’t going to bother with you,” he said.

That purported lack of government focus on the crime has had implications for banks, Dowling said. He said some banks are detecting tax fraud activity — which is apparent when an account is receiving tax refunds for numerous people with different surnames — and are left with accounts containing large sums of fraud proceeds. Some have been left holding tens or even hundreds of millions of dollars, he said.

“After the bank has filed a suspicious activity report and called the government, the government should come with seizure warrants,” he said, adding that in some cases that has not occurred in a timely manner.

Dowling said he has done consulting work for two banks that were holding massive sums of tax fraud proceeds and were perplexed that the government seemed uninterested in collecting the funds.

Dowling said pressure from Congress makes it hard to stop the problem. Lawmakers worry that their constituents will be unhappy if it takes too long to get their refunds, so they pressure the IRS to process refunds quickly, and as a result, information is not verified, he said.

Another career IRS special agent, who spoke on condition of anonymity because his private-sector employer had not authorized his comments, offered a similar assessment when asked whether federal law enforcement officials have done enough to combat identity theft-related tax fraud.

“They haven’t done much, they haven’t done their jobs,” he said. “They’re too concerned about being friendly with the taxpayers.”

Banks “have several ways to contact the IRS”

When contacted by Thomson Reuters, an IRS spokeswoman emailed a statement that says the agency “is aggressively pursuing identity theft across the nation, as evidenced by dozens of legal actions taken in recent days.”

“The IRS cannot confirm or deny ongoing enforcement activity. There are many different factors, beyond just the dollar amounts involved, that go into the investigations and whether a case is prosecuted. Our recent enforcement actions announced earlier this week reflect the wide spectrum of refund fraud cases we pursue in terms of size, scope and location,” the statement reads.

“As a general rule, there is not a specific dollar threshold for determining investigations or prosecutions. It’s absolutely inaccurate to say a specific dollar cut-off is involved in our efforts. We routinely interact with banks in the course of our daily business. If banks suspect they have received potentially fraudulent tax refunds, they have several ways to contact the IRS directly, either by e-mail or phone.”

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete ( ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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