Originally published on Forbes.com.
One of the strangest phenomena in the tax news of late is the scam in which people are called and persuaded to transfer money to people pretending to represent the IRS. J. Russel George, the Treasury Inspector General for Tax Administration, testifying before the Senate Budget Committee gave some details on how the scam works.
According to the victims, the scam artists made threatening statements and then demanded that the victims immediately put money on prepaid debit cards in order to avoid being arrested. The callers often warned the victims that if they hung up, local police would come to their homes to arrest them. Those who fell for the scam withdrew thousands of dollars from their bank accounts and then purchased the prepaid debit cards as instructed by the callers. Once the prepaid debit cards were purchased, the perpetrators instructed the victims to call them back and read them the numbers on the prepaid card. By the time the victims realized they had been scammed, the perpetrators had negotiated the prepaid cards, and the money was gone.
To date, TIGTA has received almost 650,000 reports of these calls. We continue to receive between 9,000 and 12,000 such reports each week. As of August 10, 2015, over 4,200 individuals have been victimized by this scam and they have reported that they have paid a total of over $21.5 million, an average of approximately $5,100 per victim. The highest reported loss by one individual was over $500,000.
So You Want To Be An IRS Telephone Scammer
I have a fascination with fraudulent schemes. The world is really fortunate that I have a chaotic good alignment, because I believe that I would have made a consummate villain. I say this because this telephone scam does not appeal to my inner villain. In order for TIGTA to have received 650,ooo reports of calls, there must have been well over 1,000,000 calls made. Of course probably not everybody who was taken by the scheme reported it. Let’s say for talking purposes that there were 1,000,000 calls and 5,000 victims.
That’s a close rate of less than 1/2 of 1%. Looked at another way, you have to make 200 phone calls to close one deal. With the average deal being around $5,000 that works out to $25 per phone call in revenue. The key is probably having your callers well trained so that they don’t waste a lot of time . The quality of the leads is probably also a factor. I was thinking of inserting a link to Alec Baldwin’s coffee is for closers speech in Glengarry Glen Ross, but the language is way too crude for me to associate it with this blog. At any rate, that is the environment I imagine these callers working in.
The whole thing is a pretty mundane form of villainy, preying on people’s fear rather than their greed. What is curious is how the scam works at all. I may be connecting some dots that shouldn’t be connected, but I do have support for my theory. I believe it is likely that most of the victims actually do owe back taxes and that it had been a long time since they had heard from the IRS. In the back of their minds, they have been expecting to be pursued making which is what makes them vulnerable.
IRS Collections
Something that most conventionally tax people and even many tax practitioners do not understand is that the determination of tax is pretty much separate from its collection. That is because conventionally tax compliant perhaps with some grumbling will send in a check with a balance due return or when an audit is resolved, perhaps after appeal, will make a payment. What happens if you don’t pay is something that does not cross their minds.
Well when you don’t pay you end up dealing with a totally different section of the IRS and a totally different set of rules. If you are proactive and work the system, you can end up with some pretty good results, since the IRS recognizes it cannot get blood from a stone. IRS Collections can send you a lot of annoying mail, but it can’t do much more than that without warning you. At that point you can file Form 12153 – Request for a Collection Due Process of Equivalent Hearing. That’s where you argue with the IRS about how much you can pay and when you can pay it. The ideal result is to be classified “currently not collectible”. You can appeal the result of the hearing to Tax Court. (I recommend that you seek help from somebody who is experienced in collection work. Many tax practitioners are not.)
If you ignore the warning or don’t do well with the hearing, the bad stuff can happen. Liens, which louse up your credit rating – Levies where they drain your bank account, garnish your pay or tell people who owe you money to pay it to the IRS or else – Seizures where they physically take your stuff.
Some More Numbers
Those liens levies and seizures can be pretty intimidating. Nonetheless there are still a lot of delinquent accounts and the number is growing. According to the IRS Databook, there were 11,721,000 at the beginning of the most recent fiscal and 12,410,000 at the end. Of course, there were accounts opened and closed during the year over 7.5 million accounts opened and not quite 7 million closed. That means that there were over 4 million accounts over a year old on September 30, 2014.
Here is the really interesting part. During the year there were about 500,000 lien notices, not quite 2 million levy notices and only 432 seizures. It appears that the IRS is not working all the delinquent accounts. A TIGTA report on the IRS automated collection system (ACS) confirms this.
The ACS uses levies as a method to collect outstanding taxes from sources such as bank accounts and wages. Most ACS levy source research is performed systemically by a computer system rather than by an ACS contact representative. ACS management sometimes scales back issuing levies at a controlled rate in an effort to limit incoming calls to a manageable level. By not issuing these levies immediately, there is a higher risk of decreased collection potential.
I’ve got some anecdotal evidence that support this. I know of at least one person who has an old delinquency who has not heard from the IRS for a long time. I suspect that anybody who at some point was classified as “currently not collectible” has a good chance of being able to wait out the ten-year statute of limitations on collection.
Is This What Makes The Scam Work?
Over the years when I have occasionally run into people who got behind on their taxes, one of the things I noted is that being behind on their taxes is rarely their only problem. It is a symptom of a larger problem. Also they tend to be overwhelmed by the situation and often try to ignore it as much as possible. Many are not proactive and are clueless about what the IRS actually does and does not do in regard to collections. And now thanks to budget cuts, the IRS is not being proactive in pursuing many of them. I think it is likely that the telephone scammers are filling this vacuum. They know that if they call a couple of 100 people that a couple of them will be people who actually do owe back taxes, but only have a vague idea of how much they owe and have no clue as to what their rights are.
Is It Time For An Amnesty?
The telephone scammers are a symptom of the larger problem of non-compliance and an overwhelmed IRS. An amnesty program that allowed for the wiping of interest and penalties for people who come forward during some limited time frame would both bring in a lot of money and also get a lot of people out of the shadows. It is very similar to the problem of undocumented aliens. We don’t have the resources to round them up and kick them out and probably for the most part don’t really want to. Unlike the undocumented, people with tax debts not being worked by IRS collections may be eventually saved by the ten-year statute of limitations on collections, but many, if not most, of them probably are not aware of that and will remain feeling vulnerable indefinitely.
Regardless, if you are a villain, IRS telephone scamming may be a growth field worth looking into. The opportunity looks like it will remain open for a while.
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