WRAL Investigates

Investigators: Child tax credit allows fraudsters a chance to cheat

Federal investigators uncovered more than 1,000 tax returns linked to eight addresses in North Carolina last May, with refunds worth more than $5 million. Investigators say it's part of a tax fraud scheme among suspected illegal immigrants that the Internal Revenue Service was warned about more than a decade ago but has done little to fix.

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RALEIGH, N.C. — North Carolina is part of what federal investigators call a nationwide tax fraud scheme among suspected illegal immigrants. It’s a system auditors believe invites fraud and abuse topping more than $4 billion a year.

WRAL Investigates found federal reports dating back more than a decade that warned the Internal Revenue Service about the problem. Yet, the IRS has done little to fix it.

Investigators uncovered more than 1,000 tax returns linked to eight addresses in North Carolina last May, with refunds worth more than $5 million.

Those tax fraud schemes are a problem across the U.S. and include refunds given for children, many of whom don't live in the U.S. or don’t even exist, according to the Treasury Inspector General for Tax Administration.

U.S. citizens’ Social Security numbers are used when processing tax returns. Illegal immigrants, or people in the U.S. on work visas, use an Individual Taxpayer Identification Number, or ITIN.

Those ITINs are at the center of the problem, allowing suspected illegal immigrants to get billions of dollars in tax credits for children who don't live in America, according to the Treasury Inspector General.

For taxpayers, the child tax credit offers welcome relief to families, but in a system where those children are rarely verified, the credit also allows the chance to cheat.

Federal investigators say an apartment complex in Charlotte played a major role in a $5 million tax fraud scheme. Two women, Candida Mayo Figueroa and Cathy Lee Cisneros, were arrested and charged with coordinating hundreds of bogus tax returns with fake names that flooded into a handful of mailboxes.

The IRS was tipped off after the U.S. Postal Service noticed a flood of “suspicious mailings from the U.S. Treasury Department appearing to contain Treasury checks” hitting the same mailboxes, according to court records.

Investigators tied at least 17 tax returns, totaling more than $62,000 in refunds, to a Charlotte apartment Figueroa leased. At another apartment nearby, investigators discovered 153 returns valued at $713,000 in refunds. Another address in the same apartment complex had 236 returns worth $1.1 million in refunds.

Investigators say the clustered addresses and a bank of mailboxes made for easy access to those refunds. An apartment complex manager told investigators Figueroa was seen taking mail from all three apartment mailboxes.

Down the road at another apartment complex, the tax scheme got bigger, according to investigators, who traced 398 returns to two apartments, totaling more than $1.9 million in additional child tax credits with no guarantee that the children existed or lived in the U.S.

TOTAL REFUNDS CLAIMED2110 Arrowcreek Drive, Apt. 103236$1,100,6482008 Arrowcreek Drive, Apt. 104153$713,1109053 Arborgate Drive, Apt. C206$980,2489053 Arborgate Drive, Apt. E192$947,5577825 Royal Point Drive, Apt. 10217$62,621TOTAL804$3,804,184 

Cisneros also owned a tax preparation business in a strip mall. A search of that business and her home turned up more returns, dozens of uncashed U.S. Treasury checks, a FedEx box containing dozens of birth certificates of Mexican origin and a notary public stamp and signature stamp listing Cisneros as the notary, bringing the fraud case to more than $5 million.

Figueroa's attorney, Harold Cogdell, says his client is not guilty and does not have the skill set to pull off such a scam. She and Cisneros were being held on immigration detainers. Both pleaded not guilty initially, but later changed their pleas to guilty. They will be sentenced at a later date. 

Despite Cogdell’s claim that his client is incapable of the tax fraud scheme, one group has been warning the IRS for years that ITIN fraud is a problem and is fairly easy to cash in. The battle is documented in four audits from the Treasury Inspector General for Tax Administration.

More than a dozen years ago, auditors wrote, "...providing illegal aliens with valid ITINs allows for certain tax advantages and increases the potential for fraud." Ten years later, they identified $1.8 billion in additional child tax credits to ITIN filers, noting those refunds went to "individuals with no tax liability."

The IRS defended its interpretation of the tax code, which states that illegal immigrants who pay no taxes are eligible for the tax credits. Filtering out who is not eligible is the problem.

“These applications for ITINs coming from the same address, thousands of applications … or thousands of returns coming from the same address – that screams fraud,” said former federal prosecutor Clay Wheeler, who specializes in tax fraud cases and currently works for Kilpatrick, Townsend and Stockton law firm in Raleigh. “It looks to me like the ITIN system has a lot of holes in it that need to be fixed … You can't help but be angry about that kind of fraud.”

A chart in the Treasury Inspector General’s July 2011 report shows a rapid rise in tax refunds that went to ITIN holders, who were four times more likely to request the child tax refund compared with those with Social Security numbers. In five years, those refunds quadrupled. Despite that, the IRS didn’t budge and said it planned to keep paying until Congress tells it to stop.

“It's an agency that's subject to a lot of political pressures from both sides,” Wheeler said.

An IRS spokesman declined to comment specifically on WRAL Investigates' report, but pointed to a June 22 statement about strengthening ITIN application requirements.

This year, the Treasury Inspector General found more problems, noting an undisclosed Raleigh address that received more than 2,400 tax returns worth more than $7 million. It called the IRS's ITIN review process so deficient that the same person could easily get multiple numbers.

“An IRS program that allowed other people, non-IRS employees, to certify the documents for getting these ITINs – that seems like a recipe for disaster,” Wheeler said.

When it comes to state tax returns, WRAL Investigates found the North Carolina Department of Revenue has taken steps to identify bogus ITIN returns. Canaan Huie is an attorney for the state agency, which has a team that specializes in state ITIN returns.

“Generally speaking, what we look at are the number of dependents that are being claimed and the size of the refund that’s being requested,” Huie said. “We did identify that this is a pretty significant area of non-compliance.”

While the additional child tax credit comes from federal money, the state spends extra time on ITIN returns. In 2010, nearly 6,000 ITIN tax returns were reviewed, 85 percent of which were adjusted, saving North Carolina taxpayers more than $4.7 million.

“Those results have been pretty good,” Huie said.

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