Marketing experts say that there are few words as powerful to persuade as “free.” One enterprising scamster took that concept and ran with it to steal unsuspecting taxpayers’ tax refunds.

While living in sunny San Diego, Maxim Maltsev of Russia, blended the persuasive power of the word “free” with the fact that the IRS has a free electronic tax return filing program, and harnessed the awesome reach of the Internet, to steal tax refunds owed to ordinary taxpayers, looking to get their returns prepared and filed as quickly, easily and cheaply as possible.

Maltsev admitted in federal court in California that he was part of a conspiracy to obtain federal income tax returns requesting refunds before they were electronically filed with the IRS.

The success of the scheme depended upon taxpayers being fooled into using apparently free electronic tax return filing services which were, in fact, fake.

This was possible at all because the IRS sponsors a program called “Free File,” which allows taxpayers who are “eligible” to prepare and electronically file federal tax returns for free. And, most taxpayers are eligible to take advantage of the Free File program.

For example, in 2006, the time period when Maltsev carried out his scam, approximately 70% of all taxpayers were eligible to use the Free File program. Also at that time, there were 19 Free File affiliate companies formally approved by the IRS.

These approved affiliates linked to the IRS’s official website, making possible the electronic filing, and facilitating taxpayers taking advantage of this program.

Maltsev and coconspirators (three friends of his) created websites which appeared to be Free File affiliates. The Maltsev crew then advertised their bogus sites on the Internet and through email. Taxpayers taken in by the scam filled out their income tax returns online on the websites of the fake services Maltsev & company created.

Before actually filing the tax returns with the IRS, Maltsev’s fake services changed the taxpayers’ banking information so that refunds would be sent to one of Maltsev’s own bank accounts instead of the bank account belonging to the actual taxpayer.

Maltsev’s scheme then actually filed the modified tax returns with the IRS by submitting them through the real Free File affiliate websites – those 19 affiliate companies which were actually approved by the IRS.

Ultimately, Maltsev’s scam took in more than 65 taxpayers and it redirected (i.e., stole) approximately $136,000.

In 2009, Matsev was indicted for his 2006 crime, one count of conspiracy to defraud the United States. He pled guilty and was sentenced to 18 months in federal prison and ordered to repay $136,000 to the Internal Revenue Service.

In what appears to be a continuing bid to tell taxpayers that in the current economic downturn the IRS “feels our pain,” has become a kinder, gentler government agency and tax collector, and even perhaps that the days of being a “no more Mr. Niceguy” government agency have passed into the days of “No more ‘no more Mr. Niceguy,’” IRS Commissioner Doug Shulman recently reminded taxpayers who may be owed a refund for 2005, but have not yet filed their income tax returns for 2005, to claim that refund by filing their return and to do so quickly to avoid losing it.

This may qualify as a continuing effort in light of Commissioner Shulman’s “I feel your pain” comments, published by the IRS in early January, 2009. See Feb 5, 2009 post in this blog, “IRS to Bail Out Taxpayers?” below.

IRS estimates that there is roughly $1.3 billion in unclaimed refunds for tax year 2005 awaiting more than a million taxpayers around the country.

But time is running out for these taxpayers:  Under the rules, a taxpayer has three years from the original due date of the tax return to file his or her return and so be eligible for the refund. After three years, the obligation to file a return remains, but the taxpayer’s right to collect his refund is forfeited. Applying this to tax year 2005, tax returns were due on April 15th, 2006. Three years from April 15th, 2006 is coming up soon, on April 15th, 2009.

So, not only is April 15th this year the due date for 2008 tax returns, but it is the “drop dead date” for claiming a refund for 2005. After that, no refund, Mr. Bond.

Commissioner Shulman said, “Especially in these tough economic times, people should not lose out on the money that is rightfully theirs.” He added, “People should check their records, especially if they had taxes withheld from their paychecks but were not required to file a tax return. They may be leaving money on the table, including valuable tax credits that can mean even more money in their pockets.”

According to IRS estimates, about half the taxpayers who can claim a refund would receive more than $581.  IRS estimates that there are approximately 76,800 taxpayers in New York due refunds at a median higher than the national average median of $581 — $639 — and a total amount of possible refunds of $82,994. New Jersey has 41,100 taxpayers due refunds at a median of $646 and a total of $43,761. Connecticut has 23,700 taxpayers due refunds at a median of $659, and a total of $18,234.

When a taxpayer files a return in time to claim a 2005 refund, that refund might be withheld if they also did not file for 2006 or 2007. The refund might also be used to pay off unpaid child support obligations, or past due federal debts like unpaid student loans or tax debts from other years.

Along with these kinder, gentler public service announcements of the Commissioner, taxpayers should not forget that the primary purpose of the IRS is in fact to collect money through taxes to fund the federal government, and that it has enormous powers beyond those of other, ordinary creditors.