IRS Paid Out Billions in Fraudulent Claims to Immigrants

The IRS has paid out as much as $5.2 billion in fraudulent tax refunds to immigrants, and ignored employees who tried to warn agency higher-ups of its mistakes, according to a new audit released Wednesday by the agency’s inspector general.

The Treasury Inspector General for Tax Administration said identity theft fraud could cost the government $21 billion over the next five years unless the IRS takes steps to crack down on the bogus use of Individual Taxpayer Identification Numbers (ITINs) which are issued to immigrants — legal and illegal — in lieu of Social Security numbers, so they can pay taxes.

“TIGTA found an environment which discourages employees from detecting fraudulent applications,” said J. Russell George, the inspector general.

IRS officials said they have already taken some steps to try to combat identity theft fraud, and disputed the potential $21 billion cost to taxpayers.

The auditors took a closer look at fraud after being prompted by senators, who said they’d heard complaints from IRS employees that their warnings were being ignored.

Mr. George confirmed that, saying IRS supervisors were urging employees to turn their backs on potential fraud from identity theft.

“This report is shocking,” said Rep. Charles Boustany, Louisiana Republican, who is chairman of the House subcommittee that oversees the IRS. “It’s one thing if the IRS tries to catch fraud and fails, but it’s quite another when management apparently takes steps to weaken program integrity.”

Identity theft is rampant, particularly for illegal immigrants who need an identity to work in the U.S.

Auditors said one address in Lansing, Mich., was cited in 2,137 tax returns, with a total of $3.3 million in refunds issued to it in 2010.

Tampa, Fla., led the way as the city with the most potentially fraudulent tax returns, with 88,724 filed. A total of $468 million in refunds were issued to those filers.

The auditors said the ability to have a refund deposited directly to accounts, including to debit cards, has been a chief method for fraud. Investigators said not having to deal with a paper check has eased fraudsters’ path — but the details of those schemes were redacted from the report.