Identity Theft Tax Fraud Now a Billion-Dollar Industry

The IRS Oversight Board’s Annual Report to Congress covering 2011 is out.

There’s not too much to report of interest here. The report talks ominously if vaguely about “a breaking point” at which the moribund agency budget combined with Congress’s enthusiasm for loading up the tax code with greater complexity, leads to “serious problems” with “adverse national repercussions.” But there’s little payoff in terms of details.

One table gives a vivid picture of the boom in identity theft based tax fraud:

number of fraudulent returns identified457,369971,5112,176,657
amount of fraudulent refunds identified$2,988,945,590$7,300,996,194$16,186,395,218
number stopped369,257881,3031,756,242
refunds stopped$2,517,094,116$6,931,931,314$14,353,795,007
refunds not stopped$471,851,474$369,064,880$1,832,600,211

The IRS receives hundreds of thousands of identity theft complaints each year, and has set up a special office to deal with them, giving this office a staff of 440 people — “a large drain on the IRS service staff” that nonetheless leaves the agency “still struggling to effectively manage identity theft cases.”

For what happens when a tax administration does reach that “breaking point,” we can look to Greece, as the New York Times did recently. Excerpts:

An essential element of Greece’s recovery plan has been to collect more taxes from a population that has long engaged in tax avoidance. The government is owed 45 billion euros in back taxes, tax officials in Athens said, only a fraction of which will ever be recovered.

To understand the difficulty, just talk to Nikos Maitos, a longtime official in Greece’s financial crimes investigation unit.

When he and a team of inspectors recently prowled the recession-hit island of Naxos for tax evaders, a local radio station broadcast his license plate number to warn residents.

“One repercussion of the crisis is that people are harder to find,” Mr. Maitos, an imposing, burly man, said last week in his sweltering office on the edge of Athens. “And when you do find them, they don’t have money.”

Even tax collectors, who have had to take large pay cuts, find that budget reductions make it hard to pay for the gasoline needed to reach their targets.

“After two and a half years of austerity, it’s really a difficult time to bring in revenue,” said Harry Theoharis, a senior official in the Greek Finance Ministry who helps oversee the country’s tax payment system. “You can’t keep flogging a dead horse.”

Income expected from a higher, 23 percent value-added tax required by the bailout agreement has fallen short by around 800 million euros in . That is partly because cash-short businesses that were once law-abiding have started hiding money to stay afloat, tax officials said.

Greece’s General Accounting Office said recently that the state collected 25 percent less revenue in than it did .

To some extent, government officials said the tax-avoiding mentality is starting to change amid an aggressive enforcement campaign aimed at 500 wealthy individuals and companies, including former ministers and heads of state agencies and enterprises. People took notice in when a former defense minister was arrested on charges of corruption and making false declarations related to his income and taxes.

“They are awed when they see inspectors now because of recent cases showing people will be prosecuted or made to pay,” Mr. Maitos said.

Tax collectors got another potential lift recently when the government started enforcing a law that gives them access to bank accounts of suspected tax evaders.

But Nikos Lekkas, a top official at the financial crimes agency where Mr. Maitos works, said Greek banks had obstructed nearly 5,000 requests for account data .

“The banks delay sending the information for 8 to 12 months,” he said. “And when they do, they send huge stacks of documents to make it confusing. By the time we can follow up, much of the money has already fled.”

In , the agency managed to assess back taxes worth 650 million euros on 210 of the cases, he said. But only 65 percent could be collected.

One challenge lies in what Mr. Lekkas calls the big fish — 18,300 offshore businesses belonging to wealthy Greek individuals and companies. Authorities are trying to trace the owners through property records, and they recently seized several large properties linked to offshore companies whose owners owe tens of millions of euros to the state.

That leaves collectors having to go after mostly smaller tax evaders, often with mixed results.

During a surveillance trip on the resort island of Santorini, Mr. Maitos said he and two colleagues observed a gas station owner insisting on cash-only transactions to avoid declaring taxes. When confronted, the man lashed at them with a bullwhip while cursing the state for taking his money.