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Another sublimely uncomplicated scam involved the earned-income tax credit (EITC), which gives a tax credit to low-income families for each of their children. No complex accounting rigmarole here. Thousands simply gave birth to paper children on their tax forms and immediately got their "credit" in checks from the IRS. The cost: "a couple of billion," according to former IRS Commissioner Larry Gibbs. But that is almost certainly a lowball figure. According to the restructuring commission, at least a quarter of the more than $25 billion in refunds went to people who were simply ineligible, and an additional 35% to 40% went to folks who were entitled to less credit, if any. That amounts to more than $5 billion annually, and as they say in Washington, pretty soon you're talking about real money.
The IRS has hustled to catch up with these scams. It ended its arrangement with banks in the refund-loan program in early 1995. At the same time, it made an emergency installation of computer filters to screen electronic returns. "It amounted to the sort of front-end screen the credit-card industry does at the point of sale," says assistant IRS commissioner Ted Brown. With new filters, the IRS discovered 4.1 million "problems" with Social Security numbers--an increase of more than 3 million from the year before. In 1995, 1.8 million dependents suddenly disappeared from the system, and there were 2 million fewer EITC claims than the year before. According to the Government Accounting Office, even the IRS's cursory effort to validate Social Security numbers on paper returns resulted in more than $800 million in reduced refunds or additional taxes.
NEAR MELTDOWNS
That same year, the IRS held up 6 million returns that seemed fishy. "The problem for the IRS," says a staff member on the restructuring commission, "was that they did not have the ability to go after 6 million people, so the agency arbitrarily took 800,000 to a million cases and tried to deal with them." According to the GAO, the IRS released 2 million questionable refund checks that year, even though its computers had detected irregularities.
IRS managers went to Congress to beg, plead and cajole for money to rectify the problem. But their entreaties fell on deaf ears. Congress just isn't very sympathetic to the IRS's real and imagined plaints. But both sides saw eye to eye on one thing: the extent and nature of the swindles had to be secret. No one wanted to give Americans a primer on how to cheat on their taxes.
This year the IRS asserts that it has a more comprehensive fraud-detection system up and running for electronic filing. The agency will not say exactly what the new system does, though it is thought to be able to provide sophisticated "matching" across various computer networks.
Alas, the fraud detection works only with electronic returns, a mere 13% of those filed. There is evidence that some unscrupulous filers have shifted back to old-fashioned paper, which bypasses the sophisticated screening. The IRS recently reviewed some rejected electronic returns only to discover that the same taxpayers subsequently refiled on paper, using the same phony Social Security numbers, and duly got their refunds.