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Americans, perhaps because they have a guilty conscience, think of the IRS as being omniscient. In fact, the IRS is often not paying attention at all. Your chances of being prosecuted for a tax crime are about the same as for being murdered on the street, 17 in a million. Fewer than 4 of every 10,000 nonfilers ever get caught. Not filing is known as noncompliance, small beer to the IRS. "We eat $200 billion a year in unpaid taxes," says Representative Bill Archer, chairman of the House Ways and Means Committee, which oversees the IRS. "All of that is fraud." The IRS's computer problems, he says, "open the door to more and more fraud."
Open the floodgates, he should say. While you've been fussing over itemization, less solid citizens have been pillaging the IRS, having discovered that the agency can't catch them. The foundation of fraud detection is what professionals call "information matching"--reconciling all the information supplied by the taxpayer (including Social Security numbers) with the information on W-2s and 1099 (miscellaneous income) forms, not to mention investment income and bank transactions. The antiquated IRS computer system is apparently unable to do this in a timely way, or sometimes to do it at all. Fraud happens between those stovepipes. "The IRS does not have a modern customer-service capability," says Jeff Trinca, staff director of the National Commission on Restructuring the IRS, "the sort of thing Visa and American Express do every day."
Frazier Todd Jr., a flimflam man from Atlanta, sussed out the IRS's inability to detect fraud. Todd obtained Social Security numbers from dozens of Atlanta women who lived in public housing projects. He then secured employer IDs from the IRS (making him look as if he were hiring them) and transcribed both numbers onto W-2 forms that he used to prepare electronic returns. Todd filled in an income for these women and a figure for taxes withheld that was high enough to kick back a generous refund. Todd then took the returns to banks to obtain "refund anticipation" loans, which came through within 48 hours. Todd's take was an estimated $511,000 over two years (tax free, of course) before an informant tipped off the IRS. He was sentenced to 30 months in jail.
Richard M. Hersch of Florida and Pennsylvania owned a tax-preparation company called Quik Tax Dollars that he turned into Quik cash. In 1991 he filed 145 false returns, using W-2 forms, fictitious names and phony Social Security numbers to get refunds for the phantom taxpayers. He too received refund anticipation loans. When the IRS began to improve its control on Social Security numbers, Hersch started using real numbers to perpetrate the same scam. All told, he filed 431 false electronic returns claiming refunds of $1,131,241. He was nabbed after the IRS raided his office in 1993, and is serving five years in a federal prison. No one knows how many folks pulled off this ruse, but it is safe to say that most were never caught.