WASHINGTON — The Internal Revenue Service's fast-growing system for allowing taxpayers to file their returns electronically has brought with it a wave of fraud that is costing the government millions of dollars, federal investigators reported Thursday.
Refunds for electronic returns are issued so quickly that the IRS cannot check all of them in time to catch cyberspace outlaws, the General Accounting Office told members of a House subcommittee.
Electronic filing has been a point of pride with the IRS, welcomed as a big stride along the government's vaunted information highway. But it appears that electronic filing could become a highway rest stop that beckons crooks and thieves: False filing of returns by computer soared 105% last year, said the GAO, the investigative arm of Congress.
The IRS "has perfected the art of using its computers to give out tax refunds quickly without making a corresponding effort in the area of fraud controls," said Rep. J. J. Pickle (D-Tex.), chairman of the House Ways and Means oversight subcommittee.
Thievery is relatively easy because the IRS often has as little as two days to investigate and stop a fraudulent refund after an electronic filing, compared with four to eight weeks for the traditional paper return. "The very thing that appeals to taxpayers--faster refunds--also increases IRS' vulnerability to fraud," the GAO reported.
In 1991, two Orange County men were indicted by a Los Angeles federal grand jury for allegedly obtaining about $22,000 in tax-refund loans. The Justice Department, which sent prosecutors to investigate the case, alleged that the men submitted phony W-2 forms to three Orange County tax preparers. They in turn electronically transmitted to the IRS completed tax returns based on those W-2 forms.
Once that was done, the men allegedly applied to financial institutions for refund-anticipated loans.
Electronic filing of tax returns to the IRS was first offered nationwide in 1990 and has grown rapidly. Last year, 12 million of the 115 million individual federal tax returns were filed electronically. The IRS' ambitious game plan calls for collecting 80 million returns electronically by the year 2001.
The detection of fraudulent electronic filing rose to 25,633 returns during the first 10 months of last year, a 105% increase over the 12,488 bogus returns detected during the same period a year earlier. The false returns detected last year claimed refunds of $53 million, but the IRS was able to stop only $29 million before the refunds were issued.
