In an effort to better combat crimes involving stolen identities and tax refund fraud, the Justice Department has changed the procedures it uses to handle such cases. Under Tax Division Directive No. 144, released on Sept. 18, U.S. attorneys’ offices will no longer need prior authorization from the Justice Department’s Tax Division to:
- Open tax-related grand jury investigations involving stolen identity refund fraud;
- Charge by criminal complaint persons who are engaged in these crimes; or
- Obtain seizure warrants for forfeiture of criminally derived proceeds arising from these crimes.
In cases in which a U.S. attorney obtains a criminal complaint for stolen identity refund fraud, any subsequent charging decision must be made by the Tax Division, but the Tax Division has announced new expedited review procedures for such cases.
The types of cases within the delegation of authority include but are not limited to:
- Cases in which personal identification information is stolen from an innocent person and used for a fraudulent refund claim benefiting someone other than that person.
- Cases involving large-volume false claims, in which a person sells his or her information unaware of how it will be used. This includes endorsing a Treasury check when the person does not know that the check relates to a fraudulent return.
- Cases in which a return preparer files a fraudulent refund claim using nonclient personal information that has been stolen or unlawfully used.
- Cases in which a culpable person involved in one of the above-described schemes receives, endorses, negotiates, utters, transfers, or cashes a refund check; receives, possesses, or transfers fraudulent refunds in bank accounts or through debit cards; or withdraws refunds from ATMs using prepaid debit cards.
The delegation of authority is contingent on the designation of an attorney in the U.S. attorney’s office as a point of contact to be responsible for following the requirements in the directive. The delegation is limited to crimes that involve filing wholly fraudulent returns without the taxpayer’s knowledge or consent. It does not involve crimes that require analysis of the tax laws, which are exclusively handled by the Tax Division.
The delegation also excepts cases in which:
- A taxpayer files a fraudulent return using his own Social Security number and claims a false dependency exemption using someone else’s Social Security number;
- A return preparer claims a larger refund by altering a tax return without the taxpayer’s knowledge or consent;
- A return preparer and a taxpayer conspire to file a return with an inflated refund; or
- A return preparer uses a client’s (or potential client’s) information without his knowledge, solely or in combination with another client’s information, to obtain a fraudulent refund.
The directive will be effective from Oct. 1, 2012, to Oct. 1, 2014, unless otherwise extended.
On Oct. 10, federal officials in Miami announced indictments of 40 people in 20 cases for stolen identity tax refund fraud. The indictments were the result of investigations by a multiagency task force created as a result of the change in procedure under Tax Division Directive No. 144.
The indictments included one scheme in which three defendants were charged with filing more than 5,000 returns using Social Security numbers of deceased taxpayers to claim fraudulent refunds totaling approximately $14 million, of which more than $6 million allegedly was received and deposited in the defendants’ bank accounts. Many of the other indictments involved information stolen from living taxpayers, including one in which two employees of a health care provider allegedly stole patients’ personal information and sold it and one in which a husband and wife allegedly operated two tax preparation companies from which they filed false returns for unknowing taxpayers and deposited the fraudulent refunds in the other defendants’ accounts. One defendant was charged with obtaining more than 26,000 stolen Social Security numbers and providing them to co-conspirators to use in filing fraudulent tax returns.
Identity Theft Developments
The Justice Department’s changes in procedures come at a time when the problem of identity theft and fraudulent returns is receiving much attention. In May, the House Ways and Means Oversight and Social Security subcommittees held a hearing on tax fraud involving identity theft. On the same day, the Treasury Inspector General for Tax Administration (TIGTA) released a report saying the IRS does not handle identity theft issues well (TIGTA Rep’t No. 2012-40-050).
At the May hearing, National Taxpayer Advocate Nina Olson said the Taxpayer Advocate Service she heads has seen a surge in identity theft cases, with a 97% increase in FY 2011 over FY 2010. The trend appears to be continuing in 2012, she said, with a 43% increase in the first two quarters over the same period in 2011.
In an August report, TIGTA suggested that the IRS had missed 1.5 million tax returns with potentially identity-theft-related fraudulent tax refunds in excess of $5.2 billion for the 2011 filing season (TIGTA Rep’t No. 2012-42-080). Also in August, the IRS Office of Chief Counsel explained in a memorandum to Small Business/Self-Employed Division attorneys what the IRS can do when a return is filed by an identity thief to generate a fraudulent refund and the IRS has issued a statutory notice of deficiency based on that fraudulent return.