IRS official paid $2.1 bn for nearly 800,000 phony returns in 2012

Internal Revenue Service officials paid $2.1 billion for nearly 800,000 likely phony tax returns in 2012, according to a watchdog.

''We identified 787,343 Tax Year 2012 undetected potentially fraudulent tax returns with tax refunds totaling more than $2.1 billion,'' the Treasury Inspector General for Tax Administration said in a report yesterday. Around half of 2012's phony returns were expected to due to identity theft.

However, the $2.1 billion lost to fake returns was an improvement of sorts, having decreased by about $3.1 billion since 2010, with around 700,000 fewer phony tax returns.

Dead people who ''filed'' over 12,000 tax returns received $22.2 million in refunds, while children under 14 received another almost 2,000 returns.

Investigators further reported that over 158,000 Social Security numbers were used on multiple tax returns and an estimated $162 million was paid to fakers who filed returns before the legitimate taxpayer.

The IRS had also continued to delay deactivation of tax identification numbers assigned to people that were not required to file taxes.

The identifiers were likely used by fakers to file over 140,000 tax returns worth around $375 million of refunds.

The IRS had in some ways started improving its fraudulent return detection capabilities, with measures like grouping addresses and bank routing numbers through filters to identify duplications.

Meanwhile, a spokesman said, "The FBI has opened an investigation into the recently reported incident at the Internal Revenue Service and is working with our interagency partners to determine the nature and scope of this matter."

IRS commissioner John Koskinen had said on Tuesday that cyber criminals had sought to gain access to personal tax information 200,000 times from February to May, had been successful in about half of those attempts.

According to the FBI spokesman individuals alerted to the illegal access of information needed to report "any suspected instances of identify theft" to the FBI's Crime Complaint Center at the website www.ic3.gov.

The Senate Finance Committee would hear testimony about the incident from Koskinen and J Russell George, the treasury department's inspector general for tax administration.