IRS is trying to catch stimulus payment fraud, but billions may have been paid

The Internal Revenue Service issued more than 4.4 million Economic Impact Payments last year totaling more than $5.5 billion to potentially ineligible people, according to a new report.

The report, released Thursday by the Treasury Inspector General for Tax Administration, found that as of July 16, 2020, those 4.4 million potentially ineligible payments went out to deceased individuals, potentially nonqualified dependents, nonresidents, individuals in U.S. territories (who have also received payments from the territories), and individuals with filing status changes. In response to TIGTA alerting IRS management about the potentially ineligible payments, the IRS added instructions to its website to inform people about their ineligibility and the need to return the payments, including the process they should follow. As of Oct. 1, 2020, they voluntarily returned 65,447 payments totaling more than $80 million.

Fraudsters and identity thieves have been taking advantage of the generous COVID-19 relief programs like the EIP that the federal government rushed out last year in response to the pandemic before authorities began putting in place more controls to deter criminals.

“Finally, the IRS recognized that the EIP created a new risk for tax-related identity theft,” said the TIGTA report. “In response, the IRS developed specific filters to identify potentially fraudulent filings. Once a return was identified as potentially fraudulent, it was sent to an IRS team for review. As of Nov. 11, 2020, the IRS has identified 457,325 questionable tax returns associated with the EIP for review and determined that 38,273 returns were a fraudulent EIP claim.”

The IRS has largely been successful in delivering and computing the payments authorized by Congress under the CARES Act, TIGTA acknowledged. Of the more than 157 million EIPs issued as of May 21, 2020, TIGTA found last June that the IRS correctly computed the EIP amount for 98 percent (154 million) of these payments. Congress later authorized the IRS to send out a second round of Economic Impact Payments last December as part of the Consolidated Appropriations Act, and as of Dec. 31, 2020, the IRS issued 168.2 million EIPs totaling $280 billion. The IRS has also been busy delivering a third round of EIPs this year authorized in March as part of the American Rescue Plan Act. It disbursed more than 1.8 million additional EIPS totaling over $3.5 billion under the American Rescue Plan in just the past two weeks, the IRS said Wednesday (see story).

The IRS, as required by the CARES Act, began a multipronged public awareness campaign last year to tell taxpayers about the availability of the EIP. Its efforts included coordinating with local community organizations, food banks and homeless shelters to reach unsheltered individuals; notifying approximately 9 million individuals who do not have a tax return filing requirement but may qualify for an EIP; and designating a National EIP Registration Day. The IRS also set up processes to issue a notice to each EIP recipient as required by the CARES Act. The notice gives recipients the amount of their payment and the method used to send their payment, such as direct deposit or paper check/prepaid debit card.

TIGTA made two recommendations for the IRS in the report, suggesting it create a multipronged public awareness campaign to inform the public about the availability of the Recovery Rebate Credit for individuals who died in calendar year 2020, and developing processes to identify and prevent the issuance of future EIPs to individuals who are ineligible based on the dependency requirements.