When it comes to audits, the American taxpayer is not the only one that can face challenges. According to recent news reports, the IRS itself has been audited by the Treasury Department and the results indicate problems. The audit conducted was for the 2011 tax year and documented that over $5 billion in tax refunds may have been delivered to identity thieves. California taxpayers beware!

According to reports, the IRS is not catching fraudulent returns in time to prevent refunds from being issued. While around 940,000 fraudulent returns were detected for the 2011 tax year, it is estimated that somewhere around 1.5 million more went undetected. The 2011 detected fraudulent tax returns totaled around $6.5 billion in refunds that the IRS did not remit.

One example of the extent of the fraudulent returns and identity theft is that one case resulted in the IRS sending nearly 600 individual refunds to the same checking account. These refunds totaled over $900,000 in fraudulent refunds. Direct deposited refunds is one of the concerns of investigators because direct deposit and prepaid cards do not require ID verification in order for funds to come available, which is why these methods are selected by identity thieves.

The audit and investigation has caused the IRS to examine its practices and seek out better ways to prevent and detect fraud across the nation, including California. The investigation was by Florida Sen. Bill Nelson, who (along with Sen. Tom Coburn of Oklahoma) has introduced legislation to fight identity theft in the tax system. In response, the IRS has stated that it is working to implement better protective and detective measures. If successful, it may be able to prevent billions of dollars being refunded to fraudulent parties in upcoming tax years, which is good news for everyone.

Source: The Washington Post, “Treasury audit says IRS missed more than $5 billion in ID theft-related tax fraud last year,” Aug. 2, 2012