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Beware of Gangsters Filing Tax Returns


Beware of Gangsters Filing Tax Returns

The white Cadillac on NE 167th Street in North Miami Beach had darkly tinted windows. In Florida opaque car windows are illegal, so North Miami Beach Gang Detective Craig Catlin, on patrol in an unmarked car, ran the Cadillac’s plates, wondering if it was owned or rented by gang members. The Cadillac bore Temporary Tag AIP5923, which connected it to Frantz Pierre, 33, a known member of the West Side gang. Following protocol, Catlin radioed headquarters to request a stop by officers in a marked patrol car. He also called for backup.

Frantz (top) and Terry PierreFrantz (top) and Terry Pierre

When the Cadillac was pulled over, Catlin and three other officers in flak jackets approached the car. Frantz Pierre was inside, and so was his brother Terry. There were two women in the back seat. Catlin’s partner, Rocky Festa, asked if there were guns or drugs in the car. “No,” came the prompt reply. Strewn across the center console were a handful of prepaid debit cards, marked with the name Tax Professors. The Pierre brothers said they did not know who owned the cards, so the detectives, again following protocol, impounded the plastic.

It was June 1, 2010. The next week, according to investigators and court documents, Catlin and Festa learned that the cards had been issued by Las Vegas-based PayCard USA. The actual “cardholders”—the names and personal information initially provided to the issuer—were four inmates at prisons throughout Florida. Tax Professors was a tax preparation company run by the Pierres. Its business was filing bogus tax returns using stolen identities. An investigation ultimately uncovered an operation involving hundreds of fraudulently obtained tax refunds totaling about $1.9 million. When a team from the North Miami Beach Police Department and the U.S. Secret Service—which is charged with protecting the country’s payments and financial systems—went to make arrests at Frantz Pierre’s million-dollar, seven-bedroom house in Parkland, Fla., a gated community, someone tried to throw a laptop into the pool from a second-story window. He missed, and it landed in the grass. Police also found a thumb drive in Pierre’s dresser, containing the names, birthdays, and Social Security numbers of more than 2,000 people.

That was a good day for the cops, in a bad year for law enforcement and the IRS. Organized crime has learned that stealing from the federal government can be easier and more lucrative than dealing drugs. “You know there are guys out there doing it better,” says Catlin. “We’re getting the idiots, and some of them are doing $1 million or $2 million worth in fraud.” In 2012, Wifredo Ferrer, U.S. attorney for the Southern District of Florida, formed a task force to attack the tax-fraud “epidemic.” The South Florida Identity Theft Tax Fraud Strike Force is comprised of agents from the Secret Service, the IRS’s Criminal Investigation unit, the FBI, the USPS Office of the Inspector General, and the Bureau of Alcohol, Tobacco, Firearms and Explosives, as well as officers from local police departments, including Catlin. In 2012, the Strike Force’s work resulted in 79 indictments for attempted thefts totaling $40 million. By October 2013 it had risen to 269 defendants and $449 million in intended payouts.

Although the government can be slow to build roads and fix budgets, it can issue tax returns within days. All a criminal needs to assemble fake returns are real Social Security numbers, dates of birth, bank account information, addresses, and an Internet connection. Bundles of personal data can be bought or acquired online, often in batches that number in the thousands. They’re frequently stolen from health-care providers, whose employees have access to reams of personal information, and they’re available from sites such as DOBsearch.com.

With stolen or even legally obtained identity data, thieves file for multiple refunds using various names, inputting fictional information about topics like employment, income, and dependents. They request that the money be deposited directly into a bank account, often opened with a fake name, or they have the funds loaded onto prepaid cards. Victims may not figure out something fishy has occurred for months. The identities of prisoners are especially useful, as prisoners are often not on top of their tax situation or activity in their bank accounts.

To cash out, the crooks use the prepaid cards to withdraw cash at ATMs. Alternatively, they spend the money on gift cards at major retailers like Wal-Mart (WMT) or Target (TGT). To skirt ATM daily withdrawal limits, they use Western Union (WU) to wire money to themselves. “If you have $5,000 on a pre-loadable debit card, you want to get all the money out of the account that day,” explains Catlin. Otherwise, a bank may notice it’s a bad account and freeze the funds. You don’t want to be found with the cards, either. “These guys leave the house with cards hidden in their shoes, wire the money to themselves until the account is empty, then throw the card in the trash.” Because gang members know that the IRS loads refunds onto cards on Friday mornings, they will often spend that day of the week taking money off the cards—and that night partying.

Then they do it all over again and again and again. A sting in Tampa in 2011 dismantled an operation involving $130 million in fake claims and laundered funds. Last summer, police near Miami responding to reports of a home invasion found more than 500 prepaid TurboTax (INTU)-issued Visa (V) cards, each loaded with thousands of dollars in fraudulent refunds. DIY electronic filing made easy by online tax preparation service TurboTax has been such a boon for crooks that Miami strip clubs popular with gang members have started catering to the tax-fraud set. Catlin says it’s not unheard of for this new breed of nouveau riche to burn through a brick of dollar bills in a single night. Last year, he says, one club was even advertising Turbo Thursday specials, in honor of TurboTax.

IRS officials don’t know exactly how much the nation is paying out in bogus refunds. An estimate by the U.S. Treasury Inspector General for Tax Administration puts the figure at $4 billion in 2011 alone—and potentially $21 billion by 2017. (And that includes money issued to non-citizens.) Tens of thousands of citizens will have their identities stolen. They’re not on the hook for stolen money, but they must plunge into the nightmarish process of trying to correct the record and obtain their rightful refunds. Just about anyone can and has been used: dead people, inmates, schoolchildren, retirees, military personnel, and, more likely than not, someone you know. Last year, three of the six officers in Catlin’s unit had false refunds filed under their names. (As far as anyone can tell, they weren’t targeted, just unlucky.)

Although tax refund schemers have been found all over the country, the scam’s roots are in Florida. Based on 2012 figures from the Federal Trade Commission, the rate of identity theft in Florida is the highest in the country, at 361 complaints per 100,000 residents. In metropolitan Miami, the rate is 645 per 100,000. “We can’t go out and do a traffic stop without generating some kind of fraud arrest,” says Officer Festa.
 
 
About five years ago, Catlin says he began noticing strange items during traffic stops: ledgers, folders, tax forms, and prepaid cards from Western Union and TurboTax, or reloadable MoneyPak cards. After making a few calls, he was introduced to an investigator working for Discover Card, who lent him a portable card reader. If Catlin found credit or debit cards, he used the reader to see if the cards had been re-encoded with a number or personal information that didn’t match the information printed on the card or the identity of the person in possession of it. It wasn’t tax refund fraud he was hunting—just basic card fraud. But it was a window onto the world of street-level financial crime, which was on the rise.

During the quiet hours of his midnight shift, he says he pored over the Florida Law Enforcement Handbook, looking for ways to justify traffic stops that would give him authority to search a vehicle. Many gang members in South Florida drive rental cars, which can be rented by one party and used by another for dubious exploits. They sometimes hold on to them for months at a time and customize them with windows, stereos, and more. Cruising the streets of North Miami, Catlin and Festa spot these cars everywhere, calling out “rental” whenever they see a telltale sign, such as marks on the windshield where the rental company’s sticker used to be.

During these stops, Catlin and Festa are looking for guns or drugs, as always, but they’re also keeping an eye out for notebooks with lists of names and birthdays, stacks of credit cards held together with a rubber band, checkbooks for an unknown or odd-sounding local company. If evidence isn’t sitting in plain sight, Catlin might try sweet-talking his way into a search. He’ll tell the subject he’s not going to write him up for the tinted windows, which puts the person at ease, and they can often be talked into letting him search the car. If he finds cards, subjects invariably deny ownership, just as they do with handguns and ecstasy. So Catlin deploys what he calls a catch-and-release strategy. The traffic stop ends with no arrests, but the cards are impounded.

Then he turns to credit card companies, banks, federal agencies, fraud investigators with major retailers, rental car companies, and informants on the street. Contacting the issuing bank, he says he can learn what information is on a card. If he can determine that an identity has been stolen, a subpoena to the issuer can reveal where the cards have been used and when. That’s followed by a check of video surveillance footage from a retailer or ATM, to see if the guys cashing out are the same as the ones from the traffic stop. If need be, he’ll drive or even fly to meet victims and get them to sign an IRS form that permits local law enforcement to use their identities in the pursuit of the case. That can lead to enough evidence for a federal warrant.

Over the last few years, Catlin, a brawny 46-year-old with short-cropped hair, has become one of the nation’s leading experts in street-level refund fraud and related crimes. He has developed an ability to find threads that others might overlook or simply wouldn’t bother pursuing. In one case, an unfamiliar brand of soda caught his attention. He took the can from the car’s console and found it was a fake with a hidden compartment on the bottom. Inside it were a half-dozen debit cards loaded with stolen funds. Catlin says he once pulled over a car that was a pigsty—except for some shredded paper that had been carefully stuffed into a potato chip bag. He took the shreds back to the police station and reassembled them. They turned out to be Western Union receipts for money transfers between fake names. Another time, when a subject was taking his driver’s license out of his wallet, Catlin spotted what turned out to be a $2,500 check. He later found that the account on the check was receiving bank transfers from the IRS, which led to the discovery of stolen identities and almost $200,000 in false tax returns.

North Miami Beach Gang Detective Craig CatlinNorth Miami Beach Gang Detective Craig Catlin

To cops who are less interested in these cases, or who see refund fraud and card scams as somehow not a big deal—“Who doesn’t hate the IRS?” Catlin jokes—his response is pragmatic: “These are street-level gang guys selling dope, stolen guns, doing robberies. If you don’t want to do the fraud cases, use the fraud evidence to turn informants, because they know all the players.” And there’s little evidence that the transition from drug dealer to serial filer of fake tax returns makes gangland any less violent. In 2010 a South Florida postal carrier was murdered for his master key to apartment building mailboxes, a potent resource for identity thieves. As Catlin sees it, the only difference between gangs past and present is that now they have nicer guns, thanks to their IRS-sponsored windfall.

Despite his wise-cracking nature, Catlin’s role as financial-crime fighter has not been without stress—and death threats. A few years ago, he flew his wife and family to New England, where they stayed for two weeks until the police apprehended the man who had made the threat. Catlin stayed at his house every night and kept his Colt Commando .223 caliber assault rifle close at hand. “I don’t have a death wish, but I was like, ‘Bring it.’ ” When he drives home from work each day, he slows to a crawl as he approaches his street, looking around for suspicious cars.
 
 
The remedy for refund fraud—quit delivering money so promptly—seems obvious. The IRS could wait to match stated incomes with what employers report as wages paid. Under the current system, employers don’t have to file W-2 information until late spring. A broader effort to synchronize filing times could curb fraud, along with other problems, but so far Washington has yet to graduate from talk to action on the timing question.

Slower payouts wouldn’t eliminate swindling, but they might impede the racket. “Why not wait eight weeks?” asks Catlin. “I’m no computer genius, but if someone steals my identity and files a return under my name—well, I’ve had the same job for 18 years, lived in the same house for 17, same wife for 8 years, 3 dependents, and so on. Suddenly a new return says I work at Walmart, I’m single, and live in Palm Beach with no kids? There’s got to be some kind of program that flags that.”

The IRS says it has increased the range of digital screens it uses from about 10 to dozens. (The agency will not provide details about those screens.) It’s a difficult balance to strike, between flagging what might be suspect information and accommodating dramatic but commonplace year-to-year changes in the lives of law-abiding citizens. It’s easy for TurboTax to flag anything coming from an ISP in Nigeria, and it does. At the same time, says TurboTax Vice President Bob Meighan, his company is not in the enforcement business. “It’s IRS’s job to pick up on those big changes to personal information.” But without total surveillance, it can be hard for the IRS to know that you didn’t really quit your job, end your marriage, and move to Alaska.

And there are good arguments against slower payouts. “The system is designed to give people their well-earned money as fast as possible,” says Ferrer, the U.S. attorney. This is especially important for people on the financial margins who may need the speedy payout. Millions of people who file in January do so not because they’re enviably organized but because they live paycheck to paycheck. “They’re counting on that refund,” says Meighan.

Prepaid cards could be eliminated altogether, but they’re useful to legitimate refund recipients. For one thing, they save time and money in transaction costs: no waiting for a paper check, no check-cashing fees, no vulnerable stack of cash stuffed in a purse. Prepaid cards can also promote responsible financial behavior. The card acts as a kind of de facto bank account for individuals who have thus far been excluded from typical financial services. It helps people keep money “tucked away in a less liquid form,” explains says Sarah Rotman, financial sector specialist at the Consultative Group to Assist the Poor.

Despite having more than $1 billion of its budget cut over the last few years, since 2011 the IRS has more than doubled the number of agents assigned to fraud prevention, to 3,000. Its criminal investigation unit spent more than 500,000 hours on the issue in 2012. It has also tried to assist local law enforcement agencies. Until recently, for example, fraudulent claims weren’t permissible evidence because they contain personal information. Now Catlin and others can get victims to sign the form that gives the authorities permission to submit the fake claims as evidence. Since 2011 the agency has blocked more than 12 million bogus claims that would have paid out $40 billion.

Ferrer’s office is also going after the fraudulent use of electronic filing identification numbers. EFINs are assigned by the IRS to tax preparers authorized to use its e-filing system. The EFIN is essential if you file taxes on behalf of other people, and criminals have learned that they can churn bogus returns faster by obtaining an EFIN and opening a fake tax preparation business. Working backward to see which EFINs delivered bogus claims, prosecutors in Florida were able to freeze or revoke 70 EFINs that together had been the conduit for 53,900 illegal filings.

Ferrer is eager to show off fact sheets about arrests, successful prosecutions, and tough penalties, but he has no delusions about what the “overwhelmed” IRS and his task force are up against. “This problem remains the fastest growing and most pervasive scheme there is,” he says, at least when it comes to tax dollars. Currently, he says, we have a “pay and chase” model for refund payments. But the ones doing the chasing aren’t pencil pushers at the IRS or data sleuths at the Securities and Exchange Commission. They’re street cops like Catlin.

Even as more substantial antifraud measures emerge, crooks will find new ways to pocket fraudulent claims because tax refund fraud doesn’t start with card issuers, electronic filing, Western Union, TurboTax, or even the IRS. It starts with identity theft. “We need the information to be harder to get and to use,” says Ferrer.

A nine-digit number on record all over the place is plainly not a robust way to both identify citizens and protect privacy. The IRS seems to get this. Over the past couple of years it has assigned unique PINs to people who have had their identities compromised. The PIN is used only for filing taxes, and the assigned number changes every year. Already about 770,000 Americans have one of these Identity Protection PINs, and while yet another string of numbers is a far cry from a tough-to-crack biometric ID, it is an added layer of defense.

Meanwhile, pay and chase continues. In October, Catlin testified in the case of the Pierre brothers and the massive operation that ended with the flying laptop. The three defendants were found guilty on all charges. Sentencing is slated for this winter, and prosecutors hope for 20 years. Catlin suspects the Pierres, like other perpetrators he has busted in the past, will file fake claims up until the day they are sentenced: “The money’s just too good.”

Wolman is a Bloomberg Businessweek contributor.

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