It’s likely that obtaining fraudulent payments from the federal government dwarfs all other categories of financial crime in the United States. Whether it’s obtaining Social Security disability payments under false pretenses, massive, organized Medicare fraud, or making multiple false refund claims for the Earned Income Tax Credit (EITC) or other tax provisions—it has been common knowledge for years that such fraud is widespread, and the relevant federal agencies have done little or nothing about it.
It’s not as if such fraud is particularly hard to detect. According to the Treasury Inspector General for Tax Administration (TIGTA), in 2011 alone 54,000 tax refunds totaling over $86 million were issued to 10 physical addresses. You read that right—54,000 tax refunds to only 10 addresses. A single address in Atlanta received 24,000 tax refunds in 2011. Such fraud should have been identified about the time the third check was issued to the same address.
There are several reasons why such fraud has become pervasive. Clearly, federal programs have become so massive and complex that they are no longer manageable. Yes, it’s possible for government to make so many promises to so many people that government itself is no longer competent to manage it all.
But there are other factors as well. The federal government has never made fraud prevention a major focus. Instead, too often the incentive is to keep the voters happy by making sure the checks go out quickly—and worry about fraud later, maybe. Such a “pay and chase” approach was actually the official policy of Medicare until very recently, and even after the Affordable Care Act threw $77 million at the problem and instituted a glitzy new state-of-the-art anti-fraud center, Medicare fraud still climbed by $12 billion over 2010 levels.
Federal administrators have almost no incentive to prevent fraud within their programs. Indeed, the bigger the program expenditures, the more power and higher salaries accrue to the administrative class. If anything, the incentive is to ignore fraud. A July 2012 TIGTA report noted that problems "had been brought to [IRS] management's attention long ago" via a September 2002 report, but "management has failed to take sufficient action to address those deficiencies.”
The tax fraud problem—estimated to be $5.8 billion last year alone—is likewise a result of too much complexity and inadequate incentives on the part of administrators. Responsibility falls squarely at the feet of the IRS to enforce existing law but ultimately to Congress, as it’s within Congress’s power to reform and simplify programs and restructure administrator incentives to identify and prosecute fraud.
That’s why it’s shameful to see Congress pass the buck and attempt to pin the blame for tax fraud on . . . tax preparation software. That’s right—according to some in Congress, apparently TurboTax is to blame.
Tax preparation software is clearly a tool that benefits taxpayers as they attempt to comply with and avoid the pitfalls caused by this overly complicated tax code, and the widespread adoption of such software is a direct rebuke to the complexity of the tax code. To blame software for tax fraud is to blame the plumber for the clogged drain.
Software is a tool, not a licensed agent or tax preparer. Software, like all technology, is neutral—the legal responsibilities fall to the users of the software. It’s the IRS’s responsibility to develop adequate systems to screen for fraud and to identify patterns that indicate organized tax fraud, and it’s Congress’ job to force the IRS to do it.
Give us a tax code that is simple enough for taxpayers to comply with and simple enough for the IRS to administer, and you’ll dramatically reduce fraud. Force the IRS to focus on its core mission instead of acting as a political enforcer for the party occupying the White House, and the IRS will suddenly find that its budget of $10.9 billion is in fact sufficient to perform that mission.
Giovanetti is president of the Institute for Policy Innovation (IPI).