Miami beach © Gary John Norman-Lifesize-Getty Images

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.

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.

Tax refund turnaround

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 or Target. To skirt ATM daily withdrawal limits, they use Western Unionto 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-issued Visa 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.)

More from Bloomberg BusinessWeek: