Please forgive my ignorance with this question... According to FRAUD Magazine and Identity theft tax refund fraud, fraudulent refunds cost billions of dollars a year. The article lists some extraordinary numbers. For example, in 2011, the IRS reported 938,664 cases of identity theft tax refund fraud, with approximately $6.5 billion in fraudulent tax refunds issued.

Once the fraud is discovered and the real taxpayer is refunded, what happens to the former fraudulent refund? Does the IRS recover it? If so, how?

The article cited above does say this:

By the time the IRS tells the victim that it has received another tax form in his or her name, the thief has cashed the refund check and is long gone with the money. The identity thief wins, and the U.S. Treasury and the victimized taxpayer are the losers.

I guess I am in a state of disbelief. Are the thieves that sophisticated that nearly each fraudulent refund is usurped without recovering the money?

  • The IRS typically doesn't have the brawns and brains to go after smaller amounts. – Aganju Jun 27 '17 at 11:10
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    I'm curious about that part, "and the victimized taxpayer". Are they saying that if someone files a fraudulent return in my name in, say, January, and collects a refund, and then I file my legitimate return in March, that the IRS will tell me that I'm out of luck getting a refund because they already gave the money to this criminal? Why is it my problem that they were defrauded by a criminal? That's like saying that if thieves rob a store, and then after they get away I walk in, that I can be legally required to pay for the stolen merchandise. – Jay Jun 27 '17 at 15:16
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    @Jay the taxpayer will get the refund, but after a longer delay and with additional paperwork. Whether or not you feel that rises semantically to the level of being "victimized", it would certainly be unpleasant. – user4556274 Jun 27 '17 at 15:40
  • @user4556274 Okay, that sounds realistic. I can comprehend that they need to verify that this other person is the criminal and I'm the real person, and not vice versa. I suppose that's not "fair" either if I've done nothing wrong, but, etc. – Jay Jun 27 '17 at 15:43

Unfortunately, the thieves don't have to be all that sophisticated to make the money unrecoverable. What they typically do is open a phony bank account in the name of the victim. They receive the refund into the fraudulent account, and they immediately withdraw it. By the time anyone notices that the refund was fraudulent, the thief is long gone, and there is no money in the account to reclaim.

It's not just the IRS who gets ripped off this way, by the way. Thieves use a similar technique to cash stolen credit cards. The thief will open a phony merchant account and a phony bank account in the victim's name. They will run the stolen cards on the merchant account and deposit the proceeds in the phony account. They are able to withdraw the funds before the fraudulent charges are noticed and reversed, and the processing company that the merchant account was opened with ends up eating the loss (or passing it along to their legitimate customers in the form of higher rates).

Preventing this kind of fraud has costs. There are monetary costs associated with putting antifraud measures in place, and there are costs to the customers in the form of having to wait longer for their financial transactions to go through. Basically, everyone involved (the banks, the IRS, etc.) has to balance the losses against with the costs of preventing them. When fraud is rare, it's cheaper for them to eat the loss than to prevent it.

If fraud starts to become more common you will see the institutions involved put into place additional checks to prevent improper transfers. Tax return fraud has become common enough that the IRS has instituted prevention measures such as requiring information from previous year tax returns in order to receive your refund. If that doesn't curb the problem, then they will probably add more measures, and perhaps they will slow down the payment process. However, they probably won't ever get the fraud losses down to zero because that would mean both angering taxpayers by delaying refunds and spending more money on fraud prevention than they save in avoided losses.

  • Thanks RPL. I think part of the issue for me is, there's little information about the problem and its countermeasures, so on the surface, it appears they are giving before the fight. – jww Jun 27 '17 at 18:41
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    @jww: Understood. Having come by this knowledge firsthand, I frankly wish I knew less about it. – Nobody Jun 27 '17 at 21:03

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