How Should the IRS Fix Its Problem of Giving Out Erroneous Refunds?

As our economy worsens, individuals are becoming more and more creative in ways to cheat the IRS system in order to obtain large, yet fraudulent refunds. It is interesting that although the IRS is aware that this problem exists, it has yet to find a way to prevent the issuance of these fraudulent refunds, and instead has to take measures yearly in order to regain the funds that it had issued on these fraudulent tax returns.

Here are some examples:

In September, CNN reported that, a Los Angeles woman pleaded guilty to filing tax deductions for at least 20 fictitious children, which she claimed were all born on the exact same day, in order to land a $300,000 refund. Now I have heard of "Octo Mom" but 20 children is an obvious fiction. So why was this error not caught from the beginning. Why issue such a lavish refund first, then try to obtain the funds later? By then all of the funds will be disbursed, and it will be too late.

It has also been reported by the IRS, that one of the more popular tax scams is one in which individuals are convincing taxpayers that they will obtain a large refund if they follow the instructions of these unnamed individuals. First, these unnamed individuals will provide the taxpayers with the income documents needed in order to exaggerate their income, such as W-2s, 1099s, etc. Second, The individual will then use these forms to have their income tax prepared by a tax preparer that they will recommend. Lastly, the taxpayers must agree to donate some of the funds to charity or to humanitarian efforts, such as giving money to anyone less fortunate. What these taxpayers fail to realize, is that employers are required to report the W-2s, 1099s, and other income reporting documents to the IRS and/or Social Security Administration. As a result, if the income documents are fictitious, it won't be long before the IRS is notified.

The problem with our current system is that it realizes the fraud after the refund had already been issued. According to CNN, the IRS reported that its fraud investigations jumped 14% year over year to 4,706 in fiscal 2010. Meanwhile, cases that the IRS believes should be brought to court and prosecuted climbed 18% and convictions rose 4%. My suggestion would be to not issue tax refunds until after the allotted time when the IRS expects to receive all income documents from the employers, financial institutions, or other companies required to report to the IRS. The issuance of refunds should be postponed until after April 15th which is the IRS filing deadline for all income tax returns. This would give the IRS sufficient time to flag any suspicious returns prior to paying out the funds. The IRS may also automatically review all returns claiming a refund in excess of a given number that should be determined from the average return that were found to be fraudulent. There is just no justification for paying an individual $300,000 in refunds, and then ask for the money back. The chances of getting that money back is slim to none.

It makes you wonder how much of our current deficit may be due to erroneous refunds issued by the IRS doesn't it?

Reference:
http://money.cnn.com/2011/09/07/pf/tax_fraud/index.htm?iid=SF_PF_LN

Should a Non-Profit Organization be Sanctioned by the IRS for Donating to a Presidential Campaign?

A very hot and well debated topic is the allegation that Republican Candidate Herman Cain has received Forty Thousand Dollars in donation from a non-profit organization. It is also alleged that these funds were used to pay for chartered flights and Ipads. Activists are requesting that the Internal Revenue Service step in and sanction any non-profit organization or deny them of their exempt status for donating to a presidential campaign. The question becomes what powers does the IRS have under these circumstances, and should such measures be taken?

Under the Internal Revenue Code (IRC), "all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office." As a result, contributions made to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. The IRC holds that violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

However, some political activities or expenditures may not be prohibited depending on the facts and circumstances. For example, voter education activities, including presenting public forums and publishing voter education guides, conducted in a non-partisan manner do not constitute prohibited political campaign activity. In addition, other activities intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would not be prohibited political campaign activity if conducted in a non-partisan manner.

On the other hand, voter education or registration activities with evidence of bias that (a) would favor one candidate over another; (b) oppose a candidate in some manner; or (c) have the effect of favoring a candidate or group of candidates, would constitute prohibited participation or intervention.

As a result, it appears that the IRS does have the power to sanction these charitable organizations and also has the ability to strip them of their non-exempt status. Any non-profit organization that receives donations from others should not donate such funds to political campaigns. Rather, the funds should be used for the benefit and well being of society. The belief that a certain candidate can better the economy for the benefit and well being of others is insufficient, and is more like a game of Russian Roulette that is not worth undertaking. The IRS would be well in its right to step in and sanction these organizations.

What do you think, do you believe that the IRS should step in and discipline these non-profit organizations?

Reference: http://www.irs.gov/charities/charitable/article/0,,id=163395,00.html