Refund Fraud? Real-Time Solution!

Abstract

When seven million dependents vanished from the tax rolls in 1986 the IRS recovered three billion dollars in revenue. A simple enforcement measure was applied. Taxpayers were required to list the social security number (SSN) for any dependent they claimed on their tax return. Costing next to nothing to implement, the benefits of this enforcement action continue to this day.

A similar enforcement measure could be employed against refund fraud. Even though the solution is not as simple as that adopted in 1986, it is similar. The effort is worth making. The revenue loss is much larger. As before, the key to the enforcement effort is to convince the fraudsters that they can be caught in real-time.

This paper proposes a technology-based solution to refund fraud – W-2s (as well as 1099s, W-4s and W-9s) should be “digitally signed.” This solution is narrowly focused on tax compliance, and does not pursue broader concerns with identity theft that underpins some of the more serious instances of this fraud. This solution is not “paper based.” The digital signature is both an alpha-numeric string and a 2-D bar code and can be transmitted in an e-file as well as a paper document.

Employees will have the ability to independently check the accuracy of any digital signature associated with their employment by accessing an IRS web site that will identify mis-matches (if any). Employees will be able to demand that their employer correct any signatures found to be in error.

There are five classes of filing mis-match/refund frauds that this proposal confronts. The five classes are: 1. Identity mis-matches (when SSA/IRS databases do not match identity-data on the forms/returns filed); 2. When legitimate W-2s or 1099s are altered by taxpayers; 3. When fraudsters steal identities and then file false returns; 4. When taxpayers collude with professional tax-preparers (2-party collusions), and 5. When businesses, professional tax-preparers and taxpayers collude (3-party collusion).

A tax solution must reach two groups – legitimate taxpayers and outright identity thieves. A tax solution will not prevent identity theft, nor will it solve SSN theft. It does not need to do so to be successful. This is not to say that preventing refund fraud may go a long way to reducing these thefts. Identity and SSN theft occur for many more reasons than simply to secure false refunds from the tax system.

Keywords: Refund Fraud, Real-time audit, Income Tax, SSN, Identity Theft, W-2, Form 1099, Self-certified tax documents, SDC, MEV, Encryption, CT-e, NF-e, Quebec, Belgium

JEL Classification: K14, K34