A private company that issues prepaid debit cards blocked what it suspected were fraudulent tax refunds, then sent the money back to the IRS, a city police detective said.
But the IRS ultimately sent the refunds anyway in the form of government checks, said Tampa police Detective Sal Augeri, who is part of a task force that is trying to halt a surge of tax refund fraud that investigators say has exploded in the Tampa area.
The debit card incident is but one example of what some in law enforcement see as the inability of the IRS to stop the flow of hundreds of millions of dollars in fraudulent tax refunds from federal coffers into the pockets of Tampa-area criminals who are spending taxpayer money on expensive cars, jewelry and illegal drugs.
The fraud involves the filing of phony tax returns using Social Security numbers and other personal information stolen from living and dead people — and sometimes purchased from willing participants.
The U.S. Postal Service says it stopped the delivery of an estimated $100 million in fraudulent refunds in a six-month period in Tampa, but the police chief has said that represents a fraction of the fraud that likely is happening.
Tampa Postal Inspector Doug Smith says inspectors are continuing to block the delivery of fraudulent refunds still being sent by the IRS on a daily basis — six months after the end of the traditional tax season. Smith estimated on Thursday that the Postal Service is stopping deliveries of about $1 million in refunds each week.
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Local police are frustrated about what they see as a lack of cooperation from the IRS, which is barred by law from sharing tax information with detectives who need the data to investigate fraud. Detectives also are vexed by the seeming inability of the federal government to screen tax returns so the fraudulent refunds aren't sent in the first place.
"If there's a refund check going to Florida, there should be a red flag to scrutinize it," Augeri said. "If it's coming to Tampa, that should be even more of a red flag."
U.S. Attorney Robert O'Neill says law enforcement cannot be the answer to stopping the fraud. Local law enforcement doesn't have the jurisdiction to investigate federal tax fraud, and the IRS doesn't have the resources to go after all the criminals.
"One thing that seems apparent is that there's very little, if any, front-end fraud detection," O'Neill said, adding that the agency sends out refunds quickly. "Now why that is, I don't know. I've heard a number of scenarios, but it seems like that will have to change or we're just going to be continually inundated with this type of fraud."
O'Neill said it's impossible for the justice system to handle all the perpetrators.
"You cannot prosecute your way out of a case like this if the numbers of violators are as large as law enforcement believes they are," he said. "It would just really, really pull at the seams of the system. So … something has to be put in place to prevent it from happening on such a massive scale."
A local tax attorney said the IRS screens tax returns only after refund checks are issued — long after the crooks have spent the money. "By the time the IRS discovers there may even be a potential problem, the refund is gone and the scammer is probably gone, too," said Peter Papas, who has offices in Tampa and Orlando. "They're so inundated with returns. Plus there's a furor when they don't pay these refund checks quickly."
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All of this sounds familiar to Jonathan Ellsworth, a retired investigator for the Monroe County Sheriff's Department, which in 2007 uncovered a scheme by jail inmates to file fraudulent tax returns in their own names.
Inmates booked into the county jail almost immediately would receive an education from other inmates on how to file phony tax returns by claiming they had lost their W-2 forms and typically stating they worked for companies that were out of business, Ellsworth said. "The IRS just sent the money, and they don't check that the business exists or anything," he added.
Ellsworth said the sheriff's department immediately notified the IRS and provided evidence, including recorded telephone conversations, crib sheets and identities of the participants. Everyone who was interviewed confessed immediately, Ellsworth said. Yet it took the IRS more than three years to investigate the case.
In the interim, inmates continued to file phony tax returns. And even though the IRS was told not to issue the refunds because they were fraudulent, Ellsworth said, some checks still were sent to inmates.
Ellsworth said his sense is there is little, if any, screening done on tax returns, even though it seems it would be an easy computer fix. "It's just crazy," he said. "To me, they just accept a certain amount of leakage and that's how they look at it."
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Tampa police flagged one fraudulent return ahead of time after investigators learned from an informant that a convicted felon had filed in the name of a particular dead person, Augeri said.
Detectives told the IRS the name of the felon; the name, date of birth and Social Security number of the dead person, the amount of the purported income listed on the return, and the amount of the expected refund, Augeri said. Detectives also notified the agency when the refund was expected to be delivered and provided a list of three possible addresses where it would be sent.
Not only did the IRS still send the refund, Augeri said, but it did not stop payment, and the check was cashed.
"The checks are still coming," Augeri said. "People are still making a ton of money." Police informants, he added, are asking, "How come we're not stopping it?"
Hernando County also is experiencing the fraud, according to Sgt. Jeff Kraft, who expressed frustration with the IRS in an email forwarded by the county sheriff's office.
Kraft listed "simple checks and balances that the IRS could do to stop and/or prevent many tax fraud cases," including checking income tax returns against the government's death index and checking income, employment and dependents from prior years. Also, if a taxpayer is elderly, disabled or unemployed and has not filed a return for years and then suddenly files a return, that return should be checked, Kraft said.
Augeri said that while the IRS will not share tax return information with investigators, he has obtained a number of fraudulently filed returns by subpoenaing Internet service providers of people who filed them. Many returns have the exact same numbers listed for income and amounts of refunds, he said. Ellsworth said the same thing happened with the inmate scam — inmates were given sheets of paper listing the income numbers they should use.
One problem for the IRS is that employers aren't required to send W-2 information directly to the agency. Instead, the information is required to be sent to the Social Security Administration by March 31, after most people due refunds already have filed their tax returns. Then, the Social Security information can take months to relay the W-2 data to the IRS.
The national Taxpayer Advocate, an independent service within the IRS, has suggested that Congress change those deadlines and procedures to enable verification of tax returns before refunds are sent.
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Former IRS criminal investigators say the agency does screen for fraud before sending out refunds — checking when returns are sent from prisons, for example — but that screening is limited because people want fast refunds.
"The agency culture is such, the political pressure is such that they just want to get those refunds out as quickly as possible," said Norm Meadows, a former investigator who served as the Tampa office's spokesman until his retirement last year. "If they took the time to fully audit, fully review every single item on just a basic tax return, it may be a year or many more months before each refund is generated, and the public, you know, the politicians aren't going to put up with major delays in working-class families getting their refunds from the IRS."
"They simply can't investigate every single income tax check that goes out," said former IRS investigator Jason Rasso, who now is pursuing his doctorate in accounting at the University of South Florida. "I think it really comes down to a manpower issue."
In a statement, the IRS said it has "a robust screening process with measures in place to stop fraudulent returns, but as the IRS is getting better at stopping more of these cases, we're also unfortunately seeing an increase in identity theft, including more complex schemes. We continually refine and update our filters and screening methods, while maintaining a balance that gets tax refunds to the rightful taxpayers as soon as we can.
"From 2009 through May of this year, the IRS has stopped more than $927 million in fraudulent identity-theft related refunds from getting into the wrong hands. The IRS not only stops the vast majority of fraudulent refund claims, but it also investigates and works with the Department of Justice to criminally prosecute identity theft cases against scam artists. The IRS also intends to meet with local law enforcement to strengthen collaboration on these cases."
But the head of the IRS gave a speech to the National Press Club in April in which he implicitly acknowledged most of its screening takes place after refunds are sent.
"The compliance side of our operations is largely predicated on looking back," said Commissioner Doug Shulman. "A taxpayer prepares his or her return and e-files it or sends it to us by mail. We process it and issue a refund if the taxpayer is owed one, or deposit the taxpayer's check or credit card payment for any taxes owed the government.
"The biggest deficiency is that it does not deal with taxpayer problems up-front," Shulman said in a speech in which he proposed that the government invest in a new system that would allow the IRS access to real-time information from sources such as employer W-2 forms. "An IRS audit," he added, "often occurs years after the return was filed."
Shulman also said, however, that the agency blocks "billions of dollars of refund claims before they are paid out so that we can verify the accuracy of the claim."
Ellsworth said the tax refund scam is nothing new. When it was discovered among the Monroe County inmates, investigators began researching it and found stories going back 30 years. "It's been going on forever," he said.
The IRS website lists scores of cases it has prosecuted around the country, many involving refund amounts in the millions of dollars.
"I've been in law enforcement my whole life," Ellsworth said. "I've seen some pretty ridiculous things on an individual level. (But) as a systematic thing that it seems to me could be easily solved, I've not seen anything like it."