IRS Tax Fraud On The Rise But Actual Size Of Problem Hard To Pin Down: Report

Tax fraud related to identity theft is on the rise -- but the IRS is clueless when it comes to knowing just how many people are scamming the system, according to a new government report.

From January to September 2012, close to 642,000 identity theft incidents involved tax fraud, according to a study released last week from the U.S. Government Accountability Office (GAO), an independent watchdog that works with Congress. That is a 62 percent increase from the prior year. In that same time period, the IRS paid out at least $754 million in suspicious tax refunds, the report said.

But the real number of tax returns involving identity theft is likely much higher because the crime is hard to track, according to the GAO. Even IRS officials couldn't explain the problem, telling the watchdog group: “We don’t know what we don’t know."

For American taxpayers who have had their identity used for a fake return, this means delayed refunds, extra costs to refile returns and mountains of paperwork.

Tax and fraud experts have said one reason the problem has become prevalent is because the crime is relatively easy to pull off: Scammers use electronic filing and direct deposit to receive a refund and just need someone's name and Social Security number.

That makes it hard for the IRS's software filters to easily determine which returns are legitimate and which are fraudulent.

The problem could be costing the U.S. government billions of dollars. Last August, the IRS inspector general estimated that the tax office could issue as much as $21 billion in fraudulent tax refunds over the next five years, CNBC reported.

James White, a GAO director, told The Huffington Post that unfortunately there is no “magic bullet answer” to fix this problem. One potential solution may be for the IRS to partner further with banks who are able to catch some refund fraud that goes undetected by the IRS, he said. In the first nine months of 2012, the IRS received information from 116 banks on more than 193,000 accounts linked to refund fraud.

“This is really hard,” White said. “We are talking about a crime that the crooks are trying to hide. It is real hard to measure crime that you didn't catch in the first place.”

In 2011, the IRS was successful in blocking around 262,000 in fake tax returns, yet it still lost an estimated $5.2 billion that year due to identity theft, CNNMoney reports.