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Tax Crime Nation

Tax evasion persists, and tax return scams involving identity theft are on the rise.
(Photo: topseller/Shutterstock)

(Photo: topseller/Shutterstock)

As millions of Americans rush to file their federal tax returns today, people will curse at their computers, the lines at the post office will be even longer than usual, and the nation’s collective stress may even cause a statistical increase in car crashes. Also today, if past behavior is an indicator, many, many tax crimes will also be committed. Any bureaucratic, byzantine process that promises big returns for little lies contains the threat for fraud, and just like Medicare, the federal tax system is absolutely rife with crime.

When we think of tax-related crimes, the first thing that may come to mind is tax evasion, a very popular pastime among white-collar workers, business owners, billionaires, actors, artists, and gangsters alike. Media attention to famous tax-evasion cases may not be the best way to shame or scare the public into compliance, either. Economists and behavioral scientists have found that tax evasion is something that becomes easier for people to justify and rationalize to themselves the more common it seems to be. In other words, the more widespread this crime is, the faster it continues to spread.

Federal data obtained by the AP this year indicates that "42 million individual income tax refunds filed in 2011 were filled out by unlicensed preparers," and a "New York state investigation found about 40 percent of preparers was using fraudulent practices."

Tax evasion schemes can seem just as elaborate as the tax codes the perpetrators are weaseling out of. According to a new piece in the Journal of Finance, the U.S government is trying to crack down on a new, creative system of tax evasion called “round-tripping.” Under this process, American investors move money offshore, and then disguise themselves as “foreign investors” when they bring the money back into markets here in the U.S. in order to avoid the capital gains taxes they’d otherwise be subject to. The researchers of this study found that, in 2008 alone, this process cost the federal government anywhere from $8 billion to $27 billion in lost revenue. (That same year, Demos estimated, the loss for all types of tax evasion was a whopping $357 billion.)

Aside from people and businesses avoiding paying taxes, there’s another category of tax crime—tax fraud—that’s on the rise, thanks in part to both the ease of online filing and the ease of online identity theft. This type of crime, perpetrated by a tax preparer or accountant, is sometimes committed with the client’s knowledge and willing participation. In other schemes, the person whose name is on the tax return isn’t involved at all.

For instance, just last week, Claude Verbal II, the owner of a North Carolina chain called Nothing But Taxes, pleaded guilty in federal court to preparing false tax returns (among several other charges). According to the Department of Justice’s Tax Division:

The most common types of falsifications at NBT were false dependents, false Schedule C businesses, false tip income, false Earned Income Tax Credits (EITC) and false education credits. Verbal himself falsified returns using these items and taught his managers and line employees how to do so as well. Verbal and many of his employees facilitated the purchase and sale of false dependents at NBT by purchasing the names, dates of birth and social security numbers of individuals from the community for use as false dependents on other NBT clients' tax returns.

In what was probably one of many red flags, NBT clients were awarded a bigger “tax return” if they agreed to pay for NBT’s services in cash. In addition to Verbal’s prosecution, at least seven of his employees have pleaded guilty to tax fraud, wire fraud, and aggravated identity theft. Finally, head-shakingly, a former county-employed social worker has admitted to selling the identities of Department of Social Services clients to NBT for the tax preparers to use as those aforementioned false “dependents.”

Stolen identities were the basis for another, more straightforward fraud scheme run by a whole family in Alabama. Mary Young, her husband Christian Young, and her son Octavious Reeves were sentenced in February for a scam that involved simply stealing people’s identities, filing tax returns in their names, and collecting and spending the refunds. This enterprising trio racked up $400,000 in IRS-filled prepaid debit cards before they were caught.

These schemes really can be incredibly lucrative. Verbal’s cut from the Nothing But Taxes scheme seems to be hard for prosecutors to add up; he’s since spent it all on “luxury cars, homes and jewelry.” But two brothers in Florida were sentenced in a federal court last Friday for submitting hundreds of fraudulent returns through their tax preparation businesses over several years—their scheme netted them $1.6 million.

These types of crimes are fairly common: Federal data obtained by the Associated Press this year indicates that “42 million individual income tax refunds filed in 2011 were filled out by unlicensed preparers,” and a “New York state investigation found about 40 percent of preparers was using fraudulent practices.” And according to a new study out now in Accounting and Finance Research, fraud is on the rise, too.

“Income tax return scams are increasing at an alarming rate,” writes Dr. Richard G. Brody and his colleagues. Scams have “more than doubled” from 2008 to 2012, and it’s costing the government billions every year. The causes for this increase are well known: “Tax identity theft, unscrupulous tax preparers, and the rise in online financial activity all contribute to the problem.” How to reverse the trend is a difficult question: IRS task forces and stricter privacy controls and screening in the filing process are a start.

The authors also mention that the IRS is trying to raise public awareness of these dangers (“The IRS hopes people will access, read about these scams and what to do if victimized”), but those efforts don’t seem to be much of a match for the perfect storm of easy online filing, shady tax preparers and identity-stealers, and the unfortunate inherent vulnerability of everyday online shopping, banking, and social media networking.