Hold the Phone! Tax Cheats Ripping Off the IRS

April 14, 2007 — -- Wars are expensive. They are now and they were more than a century ago.

Hard pressed to pay for the Spanish-American War in 1898, the government imposed an excise tax on long distance calls from those new-fangled telephones. It was considered a tax on the well-to-do, since they were the ones able to afford such luxuries.

The war ended quickly, but the tax remained.

Last year, Washington finally killed the tax, and offered refunds for all taxes collected after February 2003. But tax cheats figured a way to get more than they should.

"Eleven percent are requesting refunds that would have required them to pay their entire annual income in telephone service," J. Russell George, the Treasury Department's inspector general for tax administration, told ABC News. "And it's simply outrageous."

George said his auditors looked at 23,000 refunds that have already been paid.

"Over 66 percent have requested amounts that would have required the person to have paid at least a quarter of their total annual income in order to achieve the amount they're requesting for a refund," he said. "So, for example, someone with a $40,000 annual income, they're asking for $10,000 in refunds."

Cheats are getting away with that and other tax scams, according to the inspector general, because the Internal Revenue Service says it does not have enough agents to audit the returns.

"The IRS is knowingly paying out highly suspicious tax refunds," George said. "The IRS had made a decision that it is cheaper for them, or more efficient for them, to allow certain levels of fraud to occur so that they could focus on bigger items."

George sharply disagrees with the IRS' reasoning, and said so in testimony sent to Congress. He said the cost so far to the Treasury is more than $30 million.

"But that," he said, "is just at the outset."

No one knows how much the refund frauds will eventually cost. Many people are only now filing their tax returns and requesting refunds.