A San Mateo man has been indicted by a federal grand jury on charges that he fraudulently obtained a $5 million tax refund from the Internal Revenue Service, court records show.

Seth Sundberg, 34, the branch manager of a mortgage and financial business, was charged with mail fraud, falsifying a tax return and false claims in an indictment handed down Wednesday in U.S. District Court in San Jose.

On his return for tax year 2008, Sundberg allegedly claimed to have paid $5.7 million in taxes as a result of receiving “original issue discount” interest income, a form of taxable interest that is reported as it accrues, whether or not a taxpayer receives interest payments from the issuer.

Sundberg, who is also a principal for a San Carlos investment company, claimed he was owed a refund of just over $5 million, and the IRS issued a check in that amount to him in May, the indictment said.

Sundberg, who is representing himself, was booked at Santa Clara County Jail on Sept. 9. He remained in custody Thursday and could not be reached for comment.

The prosecution is an outgrowth of a larger IRS investigation into fraudulent tax returns filed on behalf of taxpayers, including jail inmates, Special Agent Quyen Madrigal of the IRS criminal investigation division wrote in an affidavit filed in support of a criminal complaint.

Authorities learned of Sundberg’s alleged scheme after staffers at a federal prison in Lassen County overheard an inmate urging an acquaintance to contact Sundberg because he “had had success,” Madrigal wrote.

The inmate wrote Sundberg a letter saying, “It was quite a surprise hearing from you. My father had been keeping me informed of your dealings in his bragging upon you. I am glad things are going well for you,” the affidavit said.

Federal prosecutors are seeking forfeiture of $322,000 in cashier’s checks, $117,473 in cash and $75,729 in silver and gold coins.

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The IRS says an online scam is preying on victims’ fears of tax collectors and draining their bank accounts.

Here’s what happens: A e-mail message pops up with a subject line that says something like “Notice of under-reported income.”

The message encourages the user to install an attachment to view their tax statement.

But when the user clicks on it, it downloads the zeus trojan virus, which hacks into the victim’s bank account.

Researchers say the scam is emptying more than $1 million a day out of victims’ accounts.

The IRS says not to open any attachments or click on any links that claim to be from the agency.

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A 34-year-old woman accused of making fake W-2 forms to file false tax claims has been arrested and booked with forgery. Capt. Andrew Kaho of the Greenville Police Department said his department and the Internal Revenue Service began investigating the case about two weeks ago when a local tax preparer contacted the IRS after discovering a counterfeit W-2 in their possession.

Kaho said police executed a search warrant at the home and found more than 75 counterfeit W-2s.

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Dozens of suspected identity thieves and others pursuing fraudulent tax refunds have been arrested in a nationwide crackdown aimed at reversing a sharp increase in crimes victimizing honest U.S. taxpayers, the IRS said Tuesday.

Trying to send a message to would-be tax criminals as the federal tax season begins in earnest, the IRS said federal investigators took action against 105 individuals in 23 states over the last week, leading to arrests and indictments, serving search warrants and producing guilty pleas and court sentences.

The Florida-to-Alaska sweep also included separate visits to 150 money service businesses in nine metropolitan areas considered at high risk for identity theft or tax refund fraud.

• STORY: Early filers may have to wait longer for their tax refund

“Identity thieves have figured out that if they can steal Social Security numbers, they can file false returns with us,” said Steven Miller, the IRS deputy commissioner for services and enforcement. “Let me be clear that we will continue to pursue the criminals who would steal from the American taxpayer.”

Calling such crimes a growing problem, Miller said the IRS last year stopped more than 260,000 fraudulent tax returns involving confirmed cases of identity theft, preventing an estimated $1.4 billion in refunds from reaching suspected criminals.

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A Broward County couple was charged Monday with cashing millions of dollars of income-tax refund checks issued by the U.S. government to people under investigation for stealing others’ identities to file alleged fake tax returns.

Wilson Lau and Kate Yuee Lau of Coral Springs were charged with bilking the government in the first of a series of tax-fraud cases expected to be filed in federal court. The husband was also charged with aggravated identity theft.

The Laus, who operated American Quick Cash Depot in Oakland Park, are accused of conspiring to “enrich themselves by charging a fee for fraudulently obtained …tax-refund checks’’ bearing forged endorsements, according to the charges. The 75-year-old husband and his 54-year-old wife will be arraigned in Fort Lauderdale federal court Tuesday.

Investigators, led by the Internal Revenue Service and Secret Service, cited two instances last year when the Laus cashed checks — one for $5,415 and another for $9,391 — that “were stolen and bore falsely made and forged endorsements and signatures.”

The forfeiture filed by the U.S. Attorney’s Office revealed the magnitude of the couple’s alleged crime: The Laus processed a total of $5.26 million in fraudulently obtained tax-refund checks, according to court documents. It was unclear how much they pocketed in commissions for processing them.

The couple’s attorney, Robert Buschel, could not be reached for comment.

“The income tax has made more liars out of the American people than golf has.” – Will Rogers

But what if it were easier? And what if the IRS made it nearly impossible to lie? What then?

Last year, IRS Commissioner Doug Shulman hinted that one way to reduce the potential for tax fraud was to have IRS prepare returns for taxpayers. That’s right, you wouldn’t have to prepare returns come tax time: the IRS would do it for you.

The idea is commonly referred to as a “simple return” or “ready return” (yes, it sounds like a snack you might buy at a Wawa). Under the plan, the IRS would send out tax returns that had already been completed with taxpayer identification and wage information. Taxpayers would merely review the returns for accuracy and sign at the bottom… kind of a “check the box if you agree” system. Taxpayers would have the opportunity to correct any mistakes prior to submitting the returns to the IRS.

Why not? The IRS already has a good chunk of taxpayer information on file. Add to that the obligations of employers, financial institutions and other third parties to provide wage and other income information to the IRS and there’s already a nice little database at the IRS’ disposal.

But putting those returns together is not cheap. Right now, the IRS simply doesn’t have the manpower to prepare returns for taxpayers and pursuant enforcement and collections activities and adding to the rosters (and thus, the budget) would be a major endeavor. Shulman, however, seems to believe that it might be worth considering.

A limited version of the plan is already in place in California. The plan, called (of course), ReadyReturn, is free to taxpayers who qualify in the Golden State. The state uses information from the prior year’s return along with information from the form W-2 to pre-fill a California state tax return. The return only needs to be reviewed by the taxpayer and signed. Brilliant, right? Then how come no one is signing on?

For one, the number of taxpayers who qualify is limited. To qualify, taxpayers must have filed a 2010 California resident return as single or head of household and no more than five dependents. Taxpayers must only have income from wages from a single employer and must claim the standard deduction with no credits other than the renter’s credit. Depending on who you are, the program was either wildly successful or a terrible failure. The pilot program, sent out to 50,000 taxpayers, had a 27% participation rate. That works out to about 13,500 taxpayers. The state has about 20 million taxpayers, making the overall participation rate less than 1/2%. In 2009, the number of participants in the program grew to 60,000 taxpayers, or about 3%. Hardly statistically significant. But the folks who are using the system appear to like it.

The program has also seen success outside of the U.S. Programs in Sweden and Denmark claim participation rates of over 75% (downloads as a pdf). Could the IRS duplicate those kinds of results?

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