IRS didn’t spot $20.6M in bogus nonresident tax refunds

A review of 2018 tax returns found 8,332 individual international tax returns filed with potentially erroneous or fraudulent refunds totaling nearly $20.6 million that weren’t identified by the IRS.

A report, released Monday by the Treasury Inspector General for Tax Administration, found the Internal Revenue Service needs to improve the way it identifies potentially fraudulent individual international tax returns while processing them, before issuing the refunds. The refunds seem to be tied to nonresident workers in the U.S. or U.S. territories who may have been victimized by identity thieves. The report noted that nonresidents of the U.S. are usually required to file a tax return to report their U.S. source income and pay any taxes that are due. In contrast, residents of a U.S. territory typically report their U.S. source income on their territory tax return and don’t have a U.S. tax return filing requirement, unless they have self-employment income of $400 or more, or are eligible to claim certain tax credits, such as the Earned Income Tax Credit and the Additional Child Tax Credit.

However, these refundable tax credits could be claimed by fraudsters and identity thieves who are exploiting the personal information of nonresident workers and prison inmates, and the overburdened IRS isn’t equipped to flag all the dubious tax refund claims. “The IRS does not have sufficient processes in place to identify potentially fraudulent individual international tax returns at the time these returns are filed,” said the report.

Andrew Harrer/Bloomberg

Individual taxpayers filed 873,009 international tax returns for tax year 2018, according to the report. Nonresidents generally file using Form 1040NR, U.S. Nonresident Alien Income Tax Return, or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents. Residents of a U.S. territory who have self-employment income or who are eligible for a tax credit file Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico), or they file Form 1040 PR, the Spanish version of Form 1040-SS.

Many of the returns were filed by fraudsters who have stolen a legitimate taxpayer’s identity. In other cases in the partially redacted report, individuals received erroneous Earned Income Tax Credits, Additional Child Tax Credits and American Opportunity Tax Credits totaling more than $83.7 million. TIGTA also found another group of 130,448 international tax returns in which individuals reduced or eliminated the federal income tax they paid on nearly $2 billion in income.

TIGTA recommended that the IRS improve the identification and prevention of potentially fraudulent individual international tax returns, require individuals to provide more documentation when making certain claims, and develop processes to address claims for which the documentation isn’t provided. TIGTA also recommended that the IRS develop processes to systematically identify and address international taxpayers who are potentially filing certain forms or claims for refundable tax credits. The IRS agreed with 12 of TIGTA’s 15 recommendations, but it didn’t agree with one suggestion to require certain documents or to work with the Department of Education to obtain Employer Identification Number data from eligible educational institutions for AOTC claims on Form 8863.

“We recognize there is more work to be done in this area and are committed to protecting U.S. taxpayers by proactively detecting potentially fraudulent refund claims and preventing their payment,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “We will continue to evaluate and refine our processes, protect revenue, and collaborate with partners and stakeholders proactively to improve prevention and detection of identity theft tax refund fraud.”