IRS issued $1b in fraudulent refunds
Treasury report says agency can't pursue all cases
WASHINGTON - The government sent out more than $1 billion in fraudulent refunds last year and offered this explanation yesterday for the bad checks in the mail: The Internal Revenue Service has too few resources to pursue every tax fraud case.
IRS investigators never even looked at an estimated $742 million in fraudulent refunds, according to a report by the Treasury office that monitors the agency. When they did identify an additional $264 million in bad refunds, it was too late to stop them from being issued.
The report noted the IRS must divide its limited resources among numerous areas of compliance. "However, this is a significant revenue loss to the federal government and that must be addressed," said J. Russell George, the Treasury's inspector general for tax administration.
The number of improper refunds filed appears to be growing rapidly, the report said. "The problem is becoming unmanageable, and the IRS cannot afford to continue handling it in the same manner as in the past," according to the report. It urged the tax agency to make the refund-screening program - known as the Questionable Refund Program - a priority.
The IRS has estimated the tax gap - the difference between taxes owed and taxes actually paid - at about $290 billion a year. Of that, about 57 percent comes from individuals understating incomes or overstating deductions and exemptions.
IRS spokesman Terry Lemons said the agency has made significant improvements in the past two years. "We stop the vast majority of fraudulent refunds."
George's report recommended the IRS divert resources to such fraud cases. But Lemons said that could hurt other operations and mean fewer dollars from enforcement activities.
The report said the IRS fraud detection centers stopped more than $1.2 billion in fraudulent refunds in 2007 versus $412 million in 2005, the last year the detection system fully functioned. 