WASHINGTON — The Internal Revenue Service may have delivered more than $5 billion in refund checks to identity thieves who filed fraudulent tax returns for 2011, Treasury Department investigators said Thursday. They estimate another $21 billion could make its way to ID thieves’ pockets over the next five years.
The IRS is detecting far fewer fraudulent tax refund claims than actually occur, according to a government audit that warned the widespread problem could undermine public trust in the US tax system. Although the IRS detected about 940,000 fraudulent returns for last year, claiming $6.5 billion in refunds, there were potentially another 1.5 million undetected cases of thieves seeking refunds after assuming the identity of a dead person, child, or someone else who normally wouldn’t file a tax return.
In one example, investigators found a single address in Lansing, Mich., that was used to file 2,137 tax returns. The IRS issued more than $3.3 million in refunds to that address. Three addresses in Florida, the epicenter of the identity theft, were used to file more than 500 returns totaling more than $1 million in refunds for each address.
In another scenario, hundreds of refunds were deposited into the same bank account. In one instance, the IRS deposited 590 refunds totaling more than $900,000 into one account.
‘‘We found multiple reasons for the IRS’s inability to detect billions of dollars in fraud,’’ J. Russell George, the Treasury Department’s inspector general for tax administration, said. ‘‘At a time when every dollar counts, these results are extremely troubling.’’
Topping the list of concerns is the IRS’s lack of timely access to third-party information it needs to verify returns.
The IRS takes pride in processing returns and issuing refunds promptly. But taxpayers can start filing their returns in mid-January, while employers and financial institutions don’t have to submit withholding and income documents for taxpayers to the IRS until the end of March. That means the IRS often issues refunds long before it can confirm the veracity of what is listed on returns.
Thieves are also exploiting vulnerabilities in the way the IRS delivers refunds, investigators found. Of the 1.5 million undetected cases of potential fraud, 1.2 million used direct deposits. Thieves often prefer those methods to a paper check, which requires a physical address to receive the check and photo ID matching the taxpayer’s name to cash it.
IRS officials said the growth of identity theft-related fraud is one of the agency’s biggest challenges. Already this year, the IRS has stopped almost $12 billion in confirmed fraud, it says. And it says its criminal investigators are actively pursuing those who perpetrate fraud.
‘‘If the IRS determines a refund has been issued improperly, we will attempt to recoup the funds,’’ said IRS spokeswoman Michelle Eldridge.
The IRS agreed with the inspector general that Congress should expand the agency’s access to resources that could help it fight theft, including the National Directory of New Hires, which helps states enforce child support orders.
But IRS officials disputed the notion that $21 billion in fraudulent returns could be issued over the next five years, arguing that the estimate didn’t take into account the IRS’s stepped-up compliance and prevention efforts.