June 16, 1993
Electronic Tax Preparers to Get
Federal Debt Info
WASHINGTON - Tax return preparers who offer electronic tax
filing will continue to be notified by the IRS if a customer owes a
Taxpayers who have an outstanding federal debt are not eligible
to ask the IRS to deposit their tax refunds directly into bank
accounts; their refunds are applied against the debt.
Many financial institutions lend money to taxpayers, in
so-called refund anticipation loans, in an amount equal to part or
all of their tax refund. Among other conditions, the financial
institutions require the taxpayer to show that the IRS will honor
the taxpayer's request for a direct deposit of the refund.
Under present procedures, the preparer transmits to the IRS the
taxpayer's return data with the request for the direct deposit of
the refund. If the IRS finds that a federal debt is owed, it
notifies the preparer only that a direct deposit will not be made.
The IRS applies tax refunds to pay outstanding federal tax
bills as well as debts totaling over $33 billion owed to 25 other
agencies. Over $20 billion of this debt is for delinquent child
support payments relating to programs administered by Health and
Human Services, and over $9 billion is for education loans
administered by the Department of Education and the Veteran
Administration. Other federal debts subject to payment by tax
refunds include housing loans, social security benefit overpayments,
farm and small business loans.
The IRS indicated last year that, starting in 1994, it would
stop giving this federal debt information to preparers as one of a
number of ways the agency planned to address the increase in
fraudulent returns filed electronically. The IRS also asked for
comments from the public on the proposal to stop giving the federal
debt information and received over 300 letters in response. Many of
those who responded pointed out that, unlike other credit details
which are available only form the IRS.
To prepare for this year's filing season, the IRS updated the
systemic checks in the questionable refund detection program, beefed
up staffing of criminal investigators trained to review potentially
fraudulent returns, and delayed dubious refunds to allow sufficient
time for investigation. All electronically filed returns were
screened to verify that the name and social security number matched
IRS' records before the return was accepted for processing, rather
than later in the operation.
Electronic return preparers also stepped up their efforts to
catch customers who were attempting to file fraudulent returns to
get refund loans. The major preparers added features to their
computer programs to spot suspect wages and withholding, gave their
employees special training to detect fraud attempts and took other
steps to screen those who were applying for loans.
While there were more attempts to file fraudulent electronic
returns during this past filing season, the IRS was more successful
in catching the schemes than ever before. Out of 110 million
returns filed so far this year, 13 million were electronic returns.
Of the 13 million electronically filed returns, 12,738 (less than
one tenth of one percent) were identified as fraudulent. These fake
returns claimed less than $30 million in refunds and the IRS stopped
77% of the money from being issued. This year IRS issued over $70
billion in refunds. The IRS finds the majority of the fraudulent
refund schemes (85%) with another 15% coming from tips from others,
such as alert return preparers.
After reviewing the electronic filing season just past, the IRS
determined that not releasing the federal debt information would not
be as effective in stopping fraudulent returns as other steps. Among
the steps IRS put in place for the next filing season are: --
requiring first time filers to get a paper refund, -- checking IRS
records before the return is accepted for processing to verify that
the Form W-2 contains valid employer identification number; --
validating SSNs of children identified on returns claiming the
earned income credit before the return is accepted for processing;
-- increasing scrutiny of preparers and transmitters allowed to
participate in the electronic filing program, and; -- requiring
electronic return preparers to advise IRS at the time the return is
filed if the taxpayer is asking for a refund loan.
The IRS and the Department of Justice have agreed to pursue
aggressively the prosecution of those accused of electronic filing
fraud. Since the start of FY 1993, IRS has initiated 464 criminal
investigations of refund fraud and has referred 357 cases to the
Department of Justice for criminal prosecution. During this same
period 64 people have been arrested, 238 indicted and 207 prosecuted
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