What is the Identity Theft Tax Refund Fraud problem

In general, tax-related identity theft occurs when an individual intentionally uses the Social Security number (SSN) of another person to file a false tax return with the intention of ob­taining an unauthorized refund. Identity theft wreaks havoc on our tax system in many ways. Victims of identity theft not only must deal with the aftermath of an emotionally draining crime, but may also have to deal with the IRS for years to untangle the resulting tax account problems. Identity theft also impacts the public fisc, as Treasury funds are diverted to pay out improper refunds claimed by opportunistic perpetrators. In addition, identity theft takes a significant toll on the IRS, tying up limited resources that it could otherwise shift to taxpayer service or compliance initiatives.

Since 2004 the National Taxpayer Advocate (TAS) has written extensively about the impact of identity theft on taxpayers and tax administration, and TAS has worked closely with the IRS to improve its efforts to assist taxpayers who become identity theft victims. TheIRS has adopted many of TAS’s recommendations and made significant progress in this area in recent years. Notwithstanding these efforts, identity theft continues to pose significant challenges for the IRS.

The Government Accountability Office (GAO) recently prepared a report on November29, 2012 titled, Identity Theft, Total Extent of Refund Fraud Using Stolen Identities is Unknown. This report found, among other things, that the IRS does not know the full extent of the occurrence of identity theft. While the IRS has made significant efforts to resolve, detect, and prevent identity theft-based fraud, the problem still exists and is continuing to grow.

According to the GAO’s report, as of September 30, 2012, the IRS had identified almost 642,000 incidents of identity theft that impacted tax administration in 2012, asignificant increase over prior years.  This figure did not include incidents related to the “Operation Mass Mail” scheme in which identity thieves used stolen identities of Puerto Rican citizens. The IRS reported that as of September 30, 2012 436,000 incidents occurred as a result of this scheme.

In the table below, tax-related identity theft incidents, identified by the IRS between 2008 and 2012, show that the problem is a large and growing one. In fact, it more than doubled between 2011 and 2012.

2008 47,730
2009 165,524
2010 147,680
2011 242,142
2012 641,690

The GAO report acknowledged that the IRS has taken multiple steps to detect, resolve, and prevent identity-theft based tax refund fraud. For example, new filtering processes in 2012 were implemented which detect identity theft based on the characteristics of incoming tax returns. The IRS also uses the Identity Protection Personal Identification Number (IP PIN), sent to victims of identity theft.

However, while these and other tools are necessary in the ongoing war on identity-theft based tax refund fraud, Committee For Efficient Government (CFEG) believes it is absolutely critical that the IRS commit and allocate most, if not all, existing and available resources now (including IRS personnel) to prevent identity theft-based tax refund fraud between the months of January, 2013 and April, 2013. This period represents the height of the 2013 tax season and most incidents of identity theft-based tax refund fraud will occur during this period of time.