The IRS is failing to go after families and others who wrongfully claim tax benefits for children who are not their legitimate dependents, the Treasury Department inspector general for tax administration has reported.
The loss to taxpayers from that inattention comes to about $380 million each year, the IG says in a little-noted report.
The scope of the apparent fraud is huge. In the 2007 tax year, the IG identified 2.4 million unique Social Security or Tax Identification numbers that showed up on more than 3.2 million tax returns. That translates into nearly 1 million fraudulent claims for deductions, tax credits or exemptions.
The most common fraud is committed by multiple relatives filing separate tax forms that claim an exemption for the same dependent child, the report said.
The IG suggested the IRS should send notices to all individuals determined to be involved in the multiple use of the numbers warning them that the practice is illegal, and to step up efforts to prevent the fraud and go after those who engage in it.
But the IRS said, in essence, that diverting resources to perform the audits the IG suggested would not be worth it because other types of fraud offer a bigger pot of money to recover. The agency did agree to engage in "corrective actions," but not until 2013.