U.S. Treasury wants financial institutions to help combat identity theft-related tax frauds

By Guest Contributor
April 2, 2012

By Brett Wolf

NEW YORK (Thomson Reuters Accelus) - U.S. Treasury Department reminded financial institutions of their obligation to lend a hand as the Internal Revenue Service struggles to crack down on rampant schemes using identity theft to obtain fraudulent tax refunds via electronic filings.

“Financial institutions are critical in identifying tax refund fraud because the methods for tax-refund distribution – direct deposit into demand deposit accounts, issuance of paper checks, and direct deposit into prepaid access card accounts – are often negotiated and deposited at various financial services providers,” Treasury’s Financial Crimes Enforcement Network (FinCEN) stated in an advisory issued Friday.Earlier this year, the IRS announced it had 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.

After that announcement, former IRS investigators told ThomsonReuters that the efforts are too little, too late. They said the IRS promoted the use of the electronic tax return filing system – which by all accounts has grown significantly in recent years — without putting into place the controls needed to effectively combat fraud.

The IRS issued $238 billion in direct deposit refunds during the 2010 tax season, an increase of nearly 8 percent over the 2009 season, according to IRS statistics.

The former investigators added that identity theft-related tax fraud has grown so pervasive in the criminal world that rap songs have been written about it and some banks have been inundated with tens or even hundreds of millions of dollars in related crime proceeds.

Jim Dowling, a former Internal Revenue Service criminal investigator special agent who has followed closely the tax fraud problem as a consultant, said Treasury’s move to tap financial institutions to help combat it is “like putting more life boats on the Titanic.”

“Why not prevent the fraud rather than investigate the fraud?” he said. “That’s the bigger bang for the buck.”

Dowling said Congress directed the IRS to issue “rapid refunds” to electronic filers, and that as a result, the IRS does not have enough time to conduct due diligence before issuing refunds. He said Congress must tell the IRS to slow down.

“The IRS is only doing what it’s directed to do. Congress has to take the hit for this,” he said.

Identity-theft tax fraud schemes generally involve using a 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 a bank account opened with a fake ID. The fraudsters then withdraw the money as cash or cashier’s checks that often are later loaded onto prepaid debit cards at check-cashing businesses.

When issuing its advisory, FinCEN reminded U.S. financial institutions that they have an obligation to report any related suspicious transactions. It included a list of “red flags” that might signal a tax fraud scheme is underway.

They include multiple refunds direct deposited into a bank account held by a single person, and spikes in the number of tax refund checks moving through accounts belonging to check-cashing businesses. Multiple prepaid cards associated with the same physical addresses, phone numbers and computer IP addresses might also signal a problem if they are primarily funded by tax refunds, according to the advisory.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete (http://accelus.thomsonreuters.com/solut 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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