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The age of electronic filing.

Electronic filing is on the rise. Over 13 million individual returns were filed electronically in 1993--an increase of 30% over 1992 (see "Why Electronic Tax Filing Is Hot," by James F. Petersen and Keith A. Washington, JofA, Oct.93, page 68).

What accounts for the growth? The waiting period for refunds often shrinks from the usual 12 weeks to 3 weeks when returns are filed electronically. Also, taxpayers can borrow up to the amount of their refund (minus filing and loan fees) from many financial institutions if the Internal Revenue Service agrees to deposit the refund directly with the lender. Such loans are known as refund anticipation loans (RALs).

Problems arise, however, when the IRS discovers a taxpayer with a RAL owes money to the federal government (for example, because of tax liabilities, Social Security overpayments and delinguent child support and education, housing farm or small business loan payments). In such cases, the IRS uses the refund to offset th taxpayer's debt--leaving little or no money to repay the loan.

The IRS says such debts exceed $33 billion annually.

According to Internal Revenue news release IR-93-53, tax return preparers who offer electronic tax filing in 1994 will be noticed by the IRS if a customer owes money to the federal government. Such taxpayers will not be eligible to have their tax refunds deposited directly into the respective bank accounts. The refunds, instead, will be applied against their debts.

The IRS will not notify affected lending institutions that direct deposits of refunds will not be made.

Fraud schemes. Another problem with electronic filing is fraud. IRS studies found about 30% of all fraudulent electronic returns came from first-time filers. About 98% of these return claimed the earned income credit and 95% of the returns applied for a RAL.

During the 1993 filing season, the IRS updated its questionable refund detection program, increased the number of criminal investigators trained to review potentially fraudulent returns and delayed dubious refunds to allow more time for investigation. Also, all electronically filed returns weere screened to verify names and Social Security numbers before processing.

Electronic return preparers also helped to spot fraud. The major preparers added features to their computer programs to flag suspect wages and withholding. They also specially trained their employees to detect fraudulent returns and loan applications.

For the 1994 tax season, the IRS will take the following steps to reduce electronic fraud:

* Require first-time filers to get a paper refund.

* Check IRS records before returns are accepted for processing in order to verify that W-2 forms include valid employer identification numbers.

* Validate the Social Security numbers of children who are identified on returns claiming the earned income credit.

* Increase scrutiny of preparers and transmitters who are allowed to participate in the electronic filing program.

* Require electronic return preparers to advise the IRS at the time returns are filed if taxpayers are asking for RALs.

Observation: The IRS and the Justice Department agreed to prosecute aggressively those accused of electronic filing fraud. While there were more attempts to file fraudulent electronic returns during the past tax season, the IRS was more successful in catching the schemes than ever before.

In 1993, fake returns claimed $30 million in refunds--but a vigilant IRS stopped 77% of the money from ever being issued.
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Article Details
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Author:Lynch, Michael F.
Publication:Journal of Accountancy
Date:Nov 1, 1993
Previous Article:Transfer of home ineffective for estate tax.
Next Article:LIFO and S corporation elections.

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