Monday, May 28, 2012

Billions in Tax Refund Fraud--and How to Stop Most of it

The Treasury may be losing as much as $5 billion a year from fraudulent tax refund claims—and most of that fraud is entirely preventable.
The New York Times reportedyesterday about the rampant use of identity theft to exploit weaknesses in the IRS’s tax refund processes, sometimes resulting in thousands of fraudulent refunds.
The most common form of fraud simply requires criminals to obtain a valid name and social security number, preferably from someone who won’t be filing a tax return. Then the criminal makes up wage and withholding information, files a tax return electronically (avoiding the need for an actual W-2 form), claims a few deductions and tax credits to produce a larger refund, and waits a couple of weeks for the refund.
Typically, the refunds are deposited electronically—often multiple refunds to the same account.  In one especially egregious example, J. Russell George, the Treasury Inspector General for Tax Administration (TIGTA), testified about 4,157 “potentially fraudulent tax refunds … totaling $6.7 million … deposited into one of 10 bank accounts. Each … account had direct deposits of more than 300 refunds.”
The criminals also use debit cards to claim fraudulent refunds.  The New York Times reported that swindlers in Florida use addresses for vacant houses (in ample supply), sometimes “even buying mailboxes for them, and collect the refunds there.”
The IRS has taken steps to stem the fraud. For example, it tries not to send refunds to dead people. All told, the IRS claims that it was able to stop $1.3 billion in potentially fraudulent returns through April 19, 2012.
But with massive budget cuts ($300 million this year) and pressure from Congress to process tax refunds quickly, the IRS is fighting a losing battle.  Mr. Russell, the Treasury Inspector General, identified 1.5 million additional potentially fraudulent refunds totaling in excess of $5.2 billion that slipped through the cracks.
With appropriate resources and legislative authority, the IRS could prevent most of these refunds.  For the past four years, it has sought authority to use the National Directory of New Hires, a database of wage and employment information maintained by the Department of Health and Human Services, to verify that information on tax returns actually corresponds to a real job.  This would limit the ability of fraudsters to make up W-2’s, but so far, Congress has not granted the IRS the authority to use that information.
The ideal solution would be for the IRS to be able to match W-2 information with tax returns before processing a refund, but W-2’s are not due until the end of March (if filed electronically, February otherwise) and they go to the Social Security Administration (SSA) rather than IRS, which further delays availability of information to the IRS.  If W-2’s were required to be transmitted to the SSA at the same time they were sent to workers and if SSA and IRS computers could talk to each other in real time, most of the refund fraud would be impossible. Obviously, this would put an additional burden on employers and some costly upgrades at SSA and IRS, so using the National Directory should be tried first.
Mr. George also said back in 2008 that “the IRS was not in compliance with direct deposit regulations that require tax refunds to be deposited into an account only in the name of the individual listed on the tax return.” The IRS has resisted that, presumably because of cost, but it seems an unfathomable oversight.  George also recommended that the IRS limit the number of deposits into the same account and that the Treasury require financial institutions to verify the identity of debit card purchasers.

Besides for the drain on the Treasury, some identity theft victims suffer real hardship. TIGTA identified 48,357 SSNs that were used multiple times on tax returns.  Some of these are simple mistakes—transposing digits, for example—but many if not most represent identity theft cases.  The criminal files early and when the legitimate taxpayer files his or her return, the IRS denies the refund. Eventually, the IRS may clear it up and issue a refund, but it has limited resources to handle these complaints and it can be a nightmare for taxpayers.  Mr. George testified that only one-fourth of calls reporting identity theft were answered and the average wait time was almost an hour during the 2012 filing season.  (The testimony has many more horror stories and is worth reading if you don’t suffer from high blood pressure.)
TIGTA also points out that some thieves are actually unscrupulous tax preparers. The IRS has started to crack down on fly-by-night preparers as part of its effort to reduce EITC fraud, which might help.  Some IRS employees have been involved in identity theft, and some thieves have impersonated IRS employees to get taxpayers’ confidential information, which is probably the hardest form of fraud to stop.
One thing that would help is stiffer penalties for fraudsters. The case studies in the TIGTA report involved large scale fraud and only about five years of jail time.
But for now, such fraud is easy as pie.  From the New York Times:
Career criminals know easy money when they see it. The police say they run across street corner drug dealers and robbers who have been in and out of prison for years now making lots of money by filing fraudulent returns. Some have been spotted driving Bentleys and Lamborghinis.
“A gentleman, a former armed robber, said: ‘I’m not doing robberies anymore. This is much cleaner. I don’t even have to use a gun,’ ” said Sgt. Jay J. Leiner of the economic crimes unit in the Broward Sheriff’s Office, which has formed a multiagency task force.
Mr. Ferrer, the United States attorney, said he had seen tax fraud overtake violent crime in Overtown, a poor, high-crime section of Miami. He said criminals there were holding filing parties, at which they would haul out laptops and, for a fee, teach others how to run the swindle.
This seems to be an issue on which bipartisan agreement would be simple. It’s theft, pure and simple, and with sufficient resources, the IRS could stop most of it.
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Friday, May 25, 2012

Could Obama v. Romney Debate Push us Back Into Recession?

With the recovery from the deepest economic downturn since the Great Depression still very much a work in progress, it is natural that the presidential candidates tout their own economic credentials and attack their opponents’. The only problem is that the overheated rhetoric might itself be bad for the economy.
Recall that recessions and recoveries are dependent on what Keynes called “animal spirits,” which can provoke waves of self-fulfilling optimism or pessimism. For example, in Keynes’s time, if a bank failed and depositors thought it an isolated event, it was.  Other banks would do just fine. If depositors thought the failure signaled  systemic failure, though, they’d want to withdraw their deposits and the resulting bank run sank even the most prudent financial institution.  Pessimism, too, is self-fulfilling. (Deposit insurance was put in place in the 1930s to prevent bank runs, by guaranteeing most deposits, and that, combined with the Glass-Steagall regulations that prevented banks from gambling with their insured deposits, worked well until the regulations were repealed and bankers went wild.)
Recessions and recoveries also depend on confidence.  If households and businesses believed that the economy was on track for solid growth, firms would invest and hire more and consumers would be willing to spend more, unburdened by the fear of imminent job loss. The prospect of higher interest rates would encourage more people to buy homes, cars, or other big-ticket items.  The boost in hiring and spending would reinforce households’ and firms’ expectations and they’d ramp up economic activity even more.  State and local tax revenues would surge, and governments would start hiring back some of the workers they have had to lay off in the past couple of years, and the newly employed workers would spend more money.  Optimism would be self-fulfilling.
But pessimism is also self-reinforcing. If businesses and consumers are pessimistic or highly uncertain, they’re less likely to hire, invest, and spend, which means that more firms shut down or lay off workers, which boost unemployment and further depresses confidence.  If most Americans were convinced we were headed back into recession, we would be.
Which brings me to the election campaign… President Obama and Governor Romney are both doing a fabulous job of explaining why the other would be incompetent to manage the economy.  Anyone paying attention who believes the rhetoric of either candidate would be forgiven for guessing that economic disaster is a 50-50 proposition (given that the polls are about evenly split). Given how salient negative political messages seem to be, independents might place the odds even higher.  And this will only get worse as we get nearer the election and candidates and super-PACs inundate us with attack ads focusing on the economy.
This is certainly not a recipe for appeasing the animal spirits.  That said, I have no idea how important this insight is.  Only a handful of presidential elections have occurred during recessions since World War II and none has been as bad as this one.  In at least some prior elections, friendly legislatures have been more inclined to enact policies to mitigate the effect of the recession, while the House and a disabling minority in the Senate seem bent on undermining this president’s programs.
If it’s true that election rhetoric hurts the economy and if the conventional wisdom is right that the economy will decide the election, then this is good for Mitt Romney. Let’s hope President Obama is wrong about what that would mean for the economy.
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Tuesday, May 8, 2012

The Jackie Robinson of Public School Teachers

On “teacher appreciation day,” as on many others, I think of Ida Peterson, my 5th and 6th grade teacher, and one of the most remarkable people I have ever known.  Mrs. Peterson taught at Spruance Elementary School in a white working class neighborhood of Philadelphia in the 1960s.  She taught the “advanced” class—this was in the days of tracking.  Teachers, parents, and students held her in awe because she was brilliant and such a gifted teacher.  All the students knew that we were lucky to have been selected for her class, and to get to experience her for two years. She spoiled us for the classes yet to come because she made us think that learning was fun and interesting. We were all very competitive and she encouraged us to get through as much reading and math as we could. I was surprised to learn in later classes that teachers wanted students to stay on the subject of the day, rather than sprint ahead as Mrs. Peterson encouraged us to do.
I remember her telling us about second-generation Americans, which most of us were, and how we would realize the dreams and aspirations that had driven our grandparents to this country. She taught us to memorize the Emma Lazarus poem inscribed on the base of the Statue of Liberty.  She seemed to be enormously hopeful about the promise of America.  In retrospect, this is all the more impressive, because I’m pretty sure that Mrs. Peterson’s grandparents did not enter Ellis Island full of hopes and dreams.
Mrs. Peterson was an African-American at a time when racism was pervasive. Almost surely her ancestors came here in shackles.  Back when most southern colleges barred “negroes” from attending and elite northern schools routinely had quotas, she attended Spelman College, the historically Black college for women in Atlanta (graduating in 1946) and later earned a Ph.D. from the University of Pennsylvania’s graduate school of education in 1985.  She joined the faculty of Spelman after she got her Ph.D.  (I’m piecing all of this together from fragments I found on the internet so the timing may not be quite right.) When she died, her will created the Ida Gartrell Peterson and Roosevelt Peterson Endowed Scholarship at Spelman to support young women pursuing degrees in education.
I didn’t realize it at the time, but Mrs. Peterson was the Jackie Robinson of teachers.  I only have a vague sense of what she must have quietly endured.  Even though the civil rights movement was at its apex while we were in her class, she rarely spoke of race.  I remember her speaking movingly of Marian Anderson singing on the steps of the Lincoln Memorial when the DAR refused to allow her to sing at Constitution Hall.  But we didn’t learn about theblack girls who were murdered in church in Birmingham a few years earlier even though Mrs. Peterson must have cried at that heinous act of terrorism.  I imagine that Mrs. Peterson must have felt like she was walking a tightrope. Teaching us about race might have gotten her fired.
She was beautiful. I wasn’t aware of that at the time.  I thought, like all adults, she was old. The picture above is from my Bar Mitzvah photo album.  As in all of her forays into Northeast Philadelphia, she was the only black person there.  I just remember being so proud that my favorite teacher came.
A couple of years ago, Mrs. Peterson’s class organized a reunion. I’ve never attended a high school reunion, but I couldn’t miss the Peterson reunion. Sadly, our teacher had passed away years earlier (in 1999), but I was surprised to see how we had mostly achieved the dreams that she urged us to pursue. I think everyone in her class graduated high school and attended college.  Many pursued advanced degrees. We were doctors, college professors, accountants, financial advisors, consultants, and even a few teachers. Given that many of us were from families where nobody had graduated college, this seems kind or remarkable.
But it palls in comparison to what Mrs. Peterson accomplished.  Thank you, Mrs. Peterson.
To celebrate Teacher Appreciation Day, I’m giving a gift in Mrs. Peterson’s memory to Spelman College.  If you’d like to join me, you can do so here.

Friday, May 4, 2012

The Silence of the Impertinent Economist

For those of you wondering about my long absence from the blogosphere, I just wanted to check in and say that I'm alive and well, but trying to finish up my overdue book (with Joel Slemrod).  I have a backlog of blog ideas that I'll share with my remaining readers soon.  For example: How the Affordable Care Act will Create Jobs (if it actually takes effect).  (The answer may surprise you.)

Okay, I'm back to work...