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Income Tax Froud Hinges On The W 2

Income Tax Fraud and the W-2

We’ve written before about the growing problem of income tax fraud in the United States.  With the ease and speed of filing tax returns electronically and receiving refunds the same way within a matter of days, rather than weeks or months, unscrupulous individuals have discovered that income tax fraud pays pretty well, even when compared with other crimes. Income Tax Froud Hinges On The W 2

Income Tax Fraud

The crime of income tax fraud starts with simple identity theft; one only needs to have someone’s name and Social Security number to file a fraudulent tax return on their behalf.  The thief can change the mailing address on the 1040 form and have the refund sent to an address of their choosing or a bank account or even a debit card.  Most income tax fraud happens relatively early in the tax season, as the crime only works if the thief can file a return before the person who owns that particular Social Security number can file their return.  It’s easy to do since employers aren’t required to mail W2 forms to their employees any earlier than the first of February.  At that time, they also send duplicate copies of those W2 forms to the IRS, ostensibly so that the agency can compare the information on the W2 they receive with the information supplied on the tax return. Income Tax Froud Hinges On The W 2

How the W2 Affects Income Tax Fraud

The W2 doesn’t represent the problem of income tax fraud, but it could be the key to the solution.  The obvious thing that should occur to anyone in this situation is – why doesn’t the IRS compare the information between the return and the W2 when the return is filed?  Wouldn’t that stop income tax fraud? That’s where things get a bit strange.  While employers are required to send W2 forms for their employees to both the employee and the Federal government, they are not required to send those forms to the IRS.  Instead, oddly enough, those forms are sent to the Social Security Administration.  The Social Security Administration then, in turn, sends those W2 forms to the IRS.  That will necessarily add a bit of a delay to the IRS receiving the forms, but it’s more complicated than that. Income Tax Froud Hinges On The W 2

Income tax fraud continues to run rampant during this time because of the scheduling of mailing these forms. While employers must mail W2 forms to their employees by February 1, they are not required to mail copies of those forms to the Social Security Administration until March 15, a full six weeks later.  The Social Security Administration doesn’t immediately forward them to the IRS, either; they’re not required to hand them over to the tax collecting agency until July.   That’s some three months after the April 15 deadline for all taxpayers to file their returns, but most taxpayers file earlier than that.  Criminals engaging in income tax fraud tend to file the earliest; and someone filing a fraudulent income tax return (or dozens of them) in early February knows that they’re going to have plenty of time to file that return, take the refund and leave town before the IRS gets around to discovering that anything is amiss. In the meantime, income tax fraud continues unabated. Income Tax Froud Hinges On The W 2

It doesn’t help that the IRS has been somewhat lax in noticing obvious cases of income tax fraud.  In one case, some 741 different income tax returns were filed using a single address in Belle Glade, Florida, for returns that totaled more than one million dollars.  In another case, the IRS processed more than two thousand returns bearing an address in Lansing, Michigan, and sent refund checks totaling more than three million dollars there. Income Tax Froud Hinges On The W 2

Since millions of taxpayers now file their returns electronically, they are generally scanned by computer, rather than by human eyes. Detecting income tax fraud should be a simple matter of having a computer system look out for multiple returns that are going to the same address. Granted, that will occasionally happen legitimately, as when two roommates file returns from the same address or when couples file their taxes separately. But there’s a difference between two or three returns being filed from the same address and seven hundred of them Income Tax Froud Hinges On The W 2

Income Tax Froud Hinges On The W 2

That should be a simple thing to fix in the IRS computer system, but government computer systems tend to be old and antiquated and red tape and bureaucracy tend to slow such things down.

Similarly, income tax fraud could be slowed down dramatically by simply making arrangements for the IRS to directly receive the W2 forms from taxpayers or at least being able to get them from the Social Security Administration in a more timely manner.  If the agency were able to directly compare the W2 forms in their possession with the information contained on the tax returns, income tax fraud could be reduced and taxpayers could save millions of dollars that are currently being paid out in the form of fraudulent income tax refunds. Income Tax Froud Hinges On The W 2

The problem of fixing income tax fraud, in the end, lies with Congress, who have long been notified about the problem but so far have been either unable or unwilling to do anything about it.  Granted, the current climate in Congress is such that little can be done about anything, but it’s hard to imagine that the issue of income tax fraud would bring about some sort of partisan divide.  After all, what politician can defend against income tax fraud?  In the meantime, the IRS has come up with a workaround in the form of something called an Identity Protection Personal Identification Number or IP PIN.  These are six-digit numbers that have been issued to taxpayers who are deemed to be “at risk” by the agency; usually, individuals who have already been victims of income tax fraud.   These taxpayers will need to use these numbers when filing future income tax returns to validate their identity with the agency. Income Tax Froud Hinges On The W 2

Income Tax Fraud Continues

Given the sheer number of taxpayers, which numbers in the hundreds of millions, it’s unlikely that the IP PIN is going to do much to deter anyone engaged in income tax fraud. That’s a volume business and as we’ve seen, some of these criminals can submit thousands of fraudulent tax returns. If a few don’t get paid by the IRS because an IP PIN wasn’t included, it won’t slow these crooks down one bit. For now, it looks like income tax fraud will continue on a large scaleIncome Tax Froud Hinges On The W 2

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