Tax return scammers steal IDs and billions

(CBS News) - Tax return fraud is a growing problem, with more than two million bogus returns filed last year with the Internal Revenue Service - returns filed by thieves who had stolen people's identities.

This type of crime is exploding because of two factors: online companies like Turbo Tax make filing taxes fast and easy; and the IRS, in an effort to get refunds out quickly, does not cross-check the returns against employers' payroll records.

To exploit that, scammers buy lists of names and Social Security numbers of living people on the black market, and troll Internet family support sites to steal the identities of the dead.

In just three years, tax refund fraud has increased by 700 percent - with $2 billion in tax dollars paid out to thieves last year alone.

Tips from IRS on protecting yourself from identity theft

In December 2008, Terry and Stephanie McClung welcomed their daughter Kaitlyn into the world. But just five months later, they lost her to sudden infant death syndrome.

"She was the most beautiful little girl," Stephanie McClung said. "She was laid back, happy, hardly ever cried."

The McClungs' grief was compounded by shock when they discovered someone had stolen their daughter's identity, and claimed her as a dependent for the $1,500 it would add to a fraudulent tax return.

"It's a slap in the face," Stephanie said. "It was only not even a year after she passed and you know we had to deal with this."

Or take the case of Sgt. Adam Ray - a West Point graduate killed by an IED in Afghanistan. Scammers filed his tax returns and had the refund issued directly to a green dot debit card from a Georgia bank.

(Watch below: Wifredo Ferrer, U.S. Attorney for the Southern District of Florida, discusses how tax fraud is reaching epidemic proportions.)

How much is the IRS paying out to people who are not the taxpayer?

"It's a number that I can't get my head around," said Tom Boyle of the U.S. Postal Inspection Service. "We know one company that you can file through. There was over $300 million filed alone." Boyle added, "And there's 20 of those companies."

The IRS told CBS News they caught 87 percent of fraudulent returns filed in 2011, and they've taken major steps to put in place new processes for handling tax returns, along with compliance filters to detect fraud.

In Sept. 2011, 49 people were arrested in Tampa for trying to bilk the government out of $130 million.

In many cases, the fraud is first detected by the mailman. "Postal carriers have been really helpful. They know their route," Boyle said. "They have told us, 'Listen, I'm getting 60 or 100s of tax returns for this one address and this one apartment building.'"

A postal inspector who worked undercover to break up a massive refund fraud in New York City said he was surprised at the amount of money, "and how easy it was for them to get some of these checks. And the amount of money that I was paid. There were times where I was handed thousands of dollars just on the street for my services."

Sen. Bill Nelson, D-Fla., has introduced legislation to increase protection for people like the McClung family and increase penalties for scammers.

"We need the hard, strong fist of the law to come down on these criminals, so that they understand they're not going to get away with this," Nelson said.

"I would like them to go to jail," Stephanie McClung said of the people behind the scam. "And I would like them to pay back every single penny they stole."

  • John Miller

    John Miller is a senior correspondent for CBS News, with extensive experience in intelligence, law enforcement and journalism, including stints in the Office of the Director of National Intelligence and the FBI.