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