The number of fraudulent tax returns has skyrocketed from just over 300 in 2007 to more than 20,000 in 2015, Maryland Comptroller Peter Franchot told the House Judiciary Committee on Wednesday, citing identity theft as a cause of this increase. Franchot strongly urged passage of House Bill 162, the “Taxpayer Protection Act” (TPA), to confer additional investigative and enforcement powers upon the Comptroller’s office to combat this rising crime. 

Franchot told the committee his office refers cases it identifies involving fraudulent tax preparers to the state Attorney General’s office, which relies primarily on one state trooper to serve subpoenas and conduct other investigative and enforcement work across the state. The TPA would expand the ability of the state to aggressively pursue fraudulent tax preparers by bringing the same kind of investigative and enforcement powers to the Comptroller’s Field Enforcement Division for investigation of income tax fraud cases that it currently has for investigation and enforcement of matters involving alcohol, tobacco and motor fuels. 

Identity theft a driver
“Less than two months into the new year, my office has already detected thousands of suspicious tax returns, causing us to halt processing of electronic tax returns from a number of Liberty Tax franchise locations and private tax preparers across our state,” said Franchot. On the day before the hearing, his office announced it had shut down an additional 11 tax prep service sites.

Tactics used by some of these fraudulent tax preparers, including some entities that offer loans against anticipated tax refunds, involve a range of actions, including falsifying deductible expenses or inflating income and related withholding, to generate a fraudulently based tax refund. 

“To give you a sense of what we are dealing with,” said Franchot, “we are talking about returns where business income is reported but the taxpayer does not own a business; refund amounts requested that were much higher than previous tax returns; inflated, undocumented or just wholly fictional business expenses; dependents claimed (where there are) no dependents; highly inflated wages and withholding information.”

He added that situations involving identity theft are “very hard for our sophisticated software to detect it, and then in March, when taxpayers send their honest refund request in, we tell them someone else already has it.” (On the day of the hearing, the IRS announced its system was subjected to an automated attack in January, using 464,000 Social Security Numbers that were stolen outside the IRS system, resulting in the release of more than 100,000 e-file personal identification numbers.) 

Schemes include loans, preying on the homeless
In addition to hacking incidents leading to identity theft, victims are sometimes duped by fraudulent tax preparers who offer to provide loans against anticipated refunds. After being entrusted with a wealth of personal data, including employment information and information from a credit check run ostensibly to provide a loan, the fraudulent preparer turns down the loan (generally causing the taxpayer to go elsewhere) but files a fraudulent return in the name of the taxpayer, directing the refund, to go to a bank account controlled by the fraudulent preparer. 

“These preparers file returns with really good information, almost exact information, claim your refund, and you don’t know until a couple months later when you file your return,” said Jeff Kelly, head of the Comptroller’s Enforcement Division. In some cases, these parties that portray themselves as tax preparers and lenders prey on low-income individuals, in particularly egregious cases, they preyed on the homeless as well. 

 “These are often massive multi-state schemes, which require collaboration across state lines with public and private entities,” Franchot said. “That’s why I recently signed (a memorandum of understanding) with the IRS, our sister states and third-party vendors to be able to better coordinate our efforts.”

Asked by a number of delegates why the Comptroller’s office is requesting an increase in the statute of limitations applicable to tax fraud cases (from three years to six), Deputy Comptroller Sharonne Bonardi explained, “We receive reports from the IRS that we are able to assess based on those reports.” She added that Comptroller’s officials receive information under the memorandum of understanding with the IRS, “but by the time they refer those criminal investigations, quite often the statute of limitations has expired. That is why we ask to have it extended.” 

What the proposed legislation would do

Franchot explained the expanded powers that HB 162 would provide:

  • “This bill will improve our ability to prevent tax fraud, expand our efforts to protect taxpayer information, and increase the authority of our field enforcement agents to effectively hold fraudulent filers and preparers accountable.
  • “It will extend the statute of limitations on tax crimes from three years to six years to allow for sufficient investigation and legal proceedings on what are often highly sophisticated cases.
  • “It will allow for injunctions to be placed on tax preparers, albeit under court supervision, while they’re under investigation for fraud so we can protect consumers while the legal process runs its course.
  • “This bill will allow my office to properly investigate tax fraud cases (by) provid(ing) the sworn officers in our Field Enforcement Division the police powers they need to carry out the Tax General Article, including issuing subpoenas and signing charging documents.
  • “This legislation will allow us to place the legal responsibility for a fraudulent return on a predatory tax preparer, as opposed to the unknowing taxpayers being used to commit fraud.”

Changes to W-2 filing requirements
In order to remove a one-month window between the date when companies must submit W-2s to employees (Jan. 31) and the current deadline to submit copies of the W-2 to the state of Maryland (currently Feb. 28), HB 162 proposes to move up the deadline for submission to Maryland to Jan. 31. Fraudulent tax preparers rush to file returns generating a fraudulently determined refund in part to take advantage of this window. 

One matter discussed during the hearing was the Comptroller’s office’s original request to remove the threshold level of a requirement for companies to submit W-2s electronically to the state. That threshold level for electronic filing of W-2s is currently applicable to companies that submit “25 or more” such W-2s. 

In response to questions from a number of delegates, the staff of the Comptroller’s office testified that they would agree to an amendment of that language. Rather than removing the threshold requirement entirely, they would agree to reduce the requirement from entities that submit “25 or more” such statements to entities that submit “10 or more” such statements. This would still provide some relief for small businesses. 

MACPA supports the TPA
MACPA CEO Tom Hood was joined by two managing partners of Maryland CPA firms in testifying in support of HB 162. 

“We think this is a good bill at the right time and urge a favorable report as amended,” Hood said.

“As you may be aware,” added Edmund “Skip” Coale, CPA, managing partner of Coale, Pripstein & Associates, “identity theft is one of the most feared crimes individuals have in the electronic age.” When a taxpayer learns that a tax return has been filed by someone else, using his or her name and Social Security number, “the consequences of this are both significant and substantial.” 

Coale explained that when a person files a return electronically only to receive a notice the return had already filed, the taxpayer is then required to file a police report and attach that report and photo ID to a return that must be filed by paper. The time period to receive any refund for overpayment of tax is significantly delayed for such taxpayers, who may be subject to as much scrutiny and documentation requirements as if under an audit. This burden on the taxpayer is on top of the stress of the identity theft and imposes additional burdens on the Comptroller’s staff as well. 

Therefore, Coale said, “I request on behalf of my clients, and on behalf of honest, hardworking tax preparers, that you assist the Comptroller in this battle to rid the community of dishonest tax preparers.”

David Goldner, CPA, CFP, CFA, managing partner of Gross Mendelsohn and Associates, P.A., echoed concerns voiced by Coale, including delays in receiving legitimate refunds when the taxpayer has been a victim of identity theft and additional administrative burdens.

“We support all efforts made to protect the public from unscrupulous preparers,” Goldner said, noting that he supports the bill with the amendment providing relief to smaller companies, to retain a threshold below which companies would not have to file W-2s electronically but could file them via paper. 

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