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An Easy Fix For a Huge Tax Fraud Problem

Having now just finished the annual exercise of getting our taxes done, it’s a good time to think about the what-if’s of our tax system.  There are the really big ideas that may never get implemented, and then there are the ones that Congress really could easily take care of if they could just agree on the time of day.

Let’s start first with three really big problems to be dealt with: 1) we as a nation spend more than we take in, 2) we have a horribly complex tax code, and 3) we have a massive fraud problem that is getting worse each year.

The Deficit

On the deficit, let’s stay out of politics please, but it’s really not that complicated.  We had a big surplus a few years back; we blew it (we all know how, but I’m not naming names), and now we’ve been working our way out of that hole for quite a long time, paying interest to the Chinese government who own our bonds, and to the twin vacuum cleaners of taxpayers’ money: the military-industrial complex and the health care-industrial complex.  If one were to look at the way the federal budget looks, it is striking to contemplate how differently the chart would look if you had ordinary citizens making these decisions.  Put ten people in a room, all from diverse backgrounds and geographic regions, and require them to reach consensus on how best to spend a few trillion dollars.  What would emerge from that room wouldn’t look anything like what Congress produces each year.  (Can you say “Education, Infrastructure, or Green Energy.”)  So while I don’t on general principle have difficulty with the concept of paying taxes as my contribution to living in a mostly free and complex society, I have a lot of trouble with how the money is spent and with unevenly applied rules.  (I might start by eliminating Congressional salaries and put them on a bonus system instead whereby they might get paid something each time they stop obstructing progress.  They train whales this way at Sea World — just reward the good behavior…)

Our Complicated Tax Code

On to more grounded thoughts.  We have a monstrously complex tax code where special moneyed interests have secured extraordinary advantages for themselves.  Thus, Warren Buffet has pointed out that he pays a lower tax rate than his secretary, and hedge fund managers get to treat their income as capital gain on the suspect theory that their income is really “carried interest.”  On top of the inequities, the sheer complexities of the code mean that whole industries have now arisen to help us taxpayers get our returns done and our ducks in a line.  And each time Congress changes something, we have to call our accountants and lawyers to find out what this means and what we need to be doing to adjust… What if we had some version of a flat tax?  It would be so much more fair, and far simpler.  The amount of lost productivity because of the need to deal with tax complexities is truly staggering.  How many days have you wasted getting it all straight?  But, alas, all those people who now make their livelihood helping us navigate the complexities would object mightily.  People now have a vested interest in maintaining the complex status quo…

Tax Fraud Problem

So here’s an easy one, that no one should have trouble swallowing: how about we close the easiest and stupidest opportunities for fraud?  An example: each year, we taxpayers lose somewhere between $5 to $10 billion on phony tax returns filed by identity theft fraudsters.  At last count, there are over 650,000 phony returns filed each year.  And we could stop it with one quick fix.

Here’s how it works: the identity thieves gain access to your name and social security number and type up a phony W-2 form, showing that you’ve paid a lot of taxes.  They then submit an electronic return on your behalf, showing inaccurately that you are due a refund.  And they submit the paperwork authorizing the IRS to send the refund money to — ahem — your new bank account.  The IRS computers, inundated with returns and refund requests, pay the money out promptly, and the agency tries to chase the mistakes later, the twin sister of the “pay ‘n’ chase” honor system used by Medicare and Medicaid.

The key to the scam, and the key to understanding how to beat it, is that the fraudsters file the phony return well before April 15th, ahead of the real taxpayer.  So the IRS can’t tell immediately that it’s a phony.  Then, usually on April 15th, the real taxpayer files and the IRS computer says “Huh, you already filed, dummy.  Call us and good luck getting this straightened out because we are under-funded and under-staffed.”  Meanwhile, the fast money has long since been pocketed and spent by the identity thefts, who are often sophisticated racketeers who know how to launder the money.

The Easy Fix

The easy fix: eliminate early filing.  In one easy swoop, Congress could save $5-10 billion and eliminate hundreds of thousands of taxpayer aggravations each year.  Problem solved.

Why not do this?  The ability to file early and claim a refund is considered a sacred right, and Congress has mandated that the IRS pay refund requests promptly.  Congress has effectively said to the agency: get these refunds paid right away because people will be happier, and we don’t want to hear complaints about slow refunds.  Eliminating the right to file early would be temporarily unpopular, but people would get over it, particularly if the problem were explained clearly.  Would you rather get your $250 dollars back two months early, or encourage further multi-billion dollar losses of the people’s money?  I think most people would get it.

Come on Congress.  Stop the fraud leaks, or we’ll zero fund your salaries.