IRS refunded $4 billion to identity thieves last year, inspector general's report says

WASHINGTON The Internal Revenue Service issued $4 billion in fraudulent tax refunds last year to people using stolen identities, with some of the money going to addresses in Bulgaria, Lithuania and Ireland, according to an inspector general's report released Thursday.

The IRS sent a total of 655 tax refunds to a single address in Lithuania, and 343 refunds went to a lone address in Shanghai.

In the U.S., more fraudulent returns went to Miami than any other city. Other top destinations were Chicago, Detroit, Atlanta and Houston.

The IRS has stepped up efforts to fight identity theft, but thieves are getting more aggressive, said the report by J. Russell George, Treasury's inspector general for tax administration. Last year, the IRS stopped more than $12 billion in fraudulent refunds from going to identity thieves, compared with $8 billion the year before.

"Identity theft continues to be a serious problem with devastating consequences for taxpayers and an enormous impact on tax administration," George said in a statement. The fraud "erodes taxpayer confidence in the federal tax system."

Thieves often steal Social Security numbers from people who don't have to file tax returns, including the young, the old and people who have died, the report said. In other cases, thieves use stolen Social Security numbers to file fraudulent tax returns before the legitimate taxpayer files.

The IRS, which takes pride in issuing quick refunds, often sends them out before employers are required to file forms documenting wages, the report said.

"The constantly evolving tactics used by scammers to commit identity theft continues to be one of the biggest challenges facing the IRS, and we take this issue very seriously," the IRS said in a statement. "The IRS has a comprehensive and aggressive identity theft strategy that focuses on preventing refund fraud, investigating these crimes and assisting taxpayers victimized by it."

Despite budget cuts, the agency said, agents have resolved more than 565,000 cases of identity theft this year, three times the number of cases resolved at the same time last year.

A separate report by George said the number of identity theft victims is on the rise as thieves get more aggressive.

Through June, the IRS identified 1.6 million victims who had their identities stolen during this year's tax filing season, the report said. That compares with 1.2 million victims in 2012.

Many of these people didn't realize they were victims until they submitted their returns only to learn from the IRS that someone else had already used their Social Security number to file and claim a refund.

The IRS does a good job of eventually identifying the proper owner of Social Security numbers, but the process can be lengthy, the report said. For cases closed between August 2011 and July 2012, it took an average of 312 days to resolve the case and issue a proper refund, the report said.

The IRS said it has resolved most of this year's identity theft cases within 120 days.

Last year, the IRS issued 1.1 million refunds to people using stolen Social Security numbers, the inspector general's report said. Those refunds totaled $3.6 billion. By comparison, the IRS issued $5.2 billion in refunds to people who stole Social Security numbers in 2011, the report said.

Additionally, the IRS issued 141,000 refunds last year to people using stolen taxpayer identification numbers, which are typically used by foreign citizens who earn money in the U.S. Those refunds totaled $385 million, the report said.

Florida is a big target of identity theft in part because of the large number of older residents living there. Older and younger people can be targets for identity theft because many don't meet the income requirements to file a federal tax return.

Nearly 38,000 potentially fraudulent refunds, totaling $147 million, were sent to addresses in Miami, the report said.

Among individual homes, one address in Orlando received 580 tax refunds totaling $870,000, the report said. Another Orlando address received 291 refunds totaling $466,000.

Sen. Bill Nelson, D-Fla., has introduced a bill that would toughen criminal penalties for people who file fake tax returns under someone else's name. The bill would also require the IRS to get legitimate taxpayers the refunds they're due within 90 days.

"While these reports show that some progress is being made in reducing tax fraud, it's also clear that there is still much to be done and there are still a number of improvements that need to be made to protect both taxpayers and the U.S. Treasury," Nelson said.