IRS Advisory Council 2012 Public Report
Internal Revenue Service Advisory Council 2012 Public Report, Pages 7 – 11
ISSUE: THE IRS MUST CONTINUE TO COMBAT REFUND FRAUD AND IDENTITY THEFT WHILE CONTINUING TO BALANCE COMPLIANCE AND TAX ENFORCEMENT
The IRS must continue to diligently look for ways to combat identity theft which leads to tax fraud. The IRSAC commends the IRS on its two-pronged effort, but is concerned that both taxpayers and the tax system will suffer if appropriate measures are not taken quickly and effectively to control this fraud.
Background Identity thieves continue to become more proficient in devising schemes to steal identities in their attempt to file fraudulent refund claims. The thief uses stolen social security numbers to prepare fraudulent Form W-2s, file tax returns and obtain refunds based on the fraudulently prepared Forms W-2 and 1040, generally very early during the filing season. Populations that have no tax filing requirements such as the elderly, children and the deceased are often the targets, making this particularly difficult to identify as an accurate return is often never required to be filed. Thieves may obtain jobs with hospitals, schools or nursing homes in order to acquire thousands of SSNs and market this information or use it themselves. Despite the fact that these thieves steal the information from sources outside of the tax system, the IRS is sometimes the first to inform an individual that identity theft has occurred, and in some cases the IRS and the individual are never aware of the fraud, leading to multiple years of fraudulent returns being filed.
The IRS has the goal of preventing identity theft and detecting refund fraud prior to its occurrence, as well as assisting taxpayers who are victims. A number of enhanced fraud protection processes for the 2012 filing season were implemented, including filters developed to stop suspect returns and contact the taxpayer before the return is processed, new tools to identify taxpayers with changed circumstances (e.g. a new job, a new bank account or debit card for the refund deposit), and enhanced use of the functionality of the Identity Protection Personal Identification Numbers (IP PINs). The IRS also developed procedures for handling taxpayer personal information that law enforcement officials discover in the course of investigating identity theft schemes or other criminal activity and is accelerating the matching of information returns to identify mismatches earlier.
In 2011, the IRS identified and prevented the issuance of over $14 billion in fraudulent returns. Identity theft is a subset of this total. From 2008 through the middle of 2012, the IRS has identified more than 600,000 taxpayers who have been affected by identity theft. With respect to these taxpayers, during 2011 the IRS protected $1.4 billion
in refunds from being erroneously sent to identity thieves. Through mid-April 2012, the IRS had stopped over 325,000 questionable returns with $1.75 billion in claimed refunds using filters specifically targeting refund fraud.
IRSAC applauds the continued efforts to assist individuals who have been impacted by identity theft. The IP PIN program began as a pilot in 2010, and was expanded in 2011. Under this program, a six-digit number is assigned to many taxpayers who are identified as identity theft victims, and had their account issues resolved. In addition, the IRS has trained 35,000 public contact employees to be able to help taxpayers who are victims of identity theft to speed up their case resolution. Taxpayers can also self-report that they are victims before their tax accounts are affected by contacting the Identity Protection Specialized Unit.
Taxpayer outreach has continued with a new section on IRS.gov dedicated to identity theft matters, outreach to educate return preparers about the IP PIN and identity theft, as well as working with software developers on inclusion of the IP PIN on the tax form.
1. The IRS should strongly consider delaying refunds until after verification of the taxpayer’s identity. For taxpayers that rely on an early refund in January, the IRS should consider a process under which 25 percent of the refund is issued prior to verification, and the remaining 75 percent issued after verification. The increased use of refund anticipation loans needs to be considered if refunds are delayed.
2. The IRS should continue to work with the banking industry to find and prosecute the perpetrators who use debit cards.
3. Authentication procedures should continue to be studied so that refunds can be processed more quickly for those taxpayers whose identity is authenticated. It may be possible to allow authentication to be made by a third party. Consideration should be given to requiring fingerprints or other unique identifiers that can be associated with the social security number on the income tax return as authentication. This could be done by local police or other approved groups and included by the taxpayer on the signature line of the return.
4. It may be possible to publicize the protections that the IRS has in place and the need to slow down refunds until information returns can be matched or verification can occur. This could be used in conjunction with requiring Form W-2s and Form 1099s to be filed with the IRS by January 31, the same date that forms are furnished to taxpayers. In addition, the IRS can publicize the importance of properly estimating taxes payable each year to avoid significant overpayments that may be delayed due to a verification process.
5. The IRS needs to continue its Criminal Investigation Division work with and prosecution by the Justice Department, making results public so that the consequences of identity theft are understood by the public.
6. The IRS should consider continued expansion of the IP PIN for taxpayers who have had their identity stolen, and perhaps for all taxpayers who request refunds before verification. There also needs to be a method of connecting a child’s identity to their parent’s return to protect the child’s SSN from identity theft.
7. Identity theft is an ongoing issue, which the IRS must deal with in order to protect the tax system. With the landscape continuously changing, identity thieves continue to create new ways of stealing personal information and using it for their gain. The IRS must continue to look for ways to improve its return processing to ensure potentially false returns are screened out at the earliest possible stages of processing. With the integrity of the tax system at stake and budgets struggling, it appears that the easiest way to combat identity theft tax fraud is to delay refunds until verification of identity can be made. While the cost of this will be taxpayer frustration with delayed refunds, the gains achieved by stopping fraudulent returns from being filed and fraudulent refunds from being issued far outweigh this frustration. By aggressively controlling this risk now, the integrity of the tax system will be less of a target in the future.
The IRSAC members are grateful for the opportunity to serve the Internal Revenue Service and taxpayers. It is readily apparent that the IRS is continually required to “do more with less” resources while operating in a complex, ever changing environment throughout the world. The IRS is to be highly commended for its historical and continued efforts, and vast accomplishments, on behalf of tax administration.