(Bloomberg) Some taxpayers seeking a quick refund may have to wait longer than usual this year as the Internal Revenue Service tries to stop criminals who steal others’ identities and file fraudulent returns.
The agency, which began accepting 2012 returns on Jan. 30, is making its automated system more sensitive to signs of potential fraud, meaning some returns will get a closer look. Last year, the IRS prevented $20 billion in fraudulent refunds from being issued, up from $14 billion the previous year.
The tax agency’s efforts to combat identity theft reflect the tension in the IRS’s multiple missions, said Benson Goldstein, a senior technical manager at the American Institute of CPAs in Washington.
The IRS has been trying to shorten processing times to accelerate refunds, in part to encourage electronic filing and in part to reduce taxpayers’ reliance on short-term loans. The speed of refunds presented an opportunity for fraud.
“It’s a difficult responsibility for the IRS,” said Goldstein, who said some legitimate taxpayers may have their refunds delayed. “They’re there to get the prompt refunds but at the same time to protect the U.S. Treasury.”
The IRS expects to meet its goal of delivering 90 percent of refunds within 21 days, Michelle Eldridge, a spokeswoman for the agency, said in an interview Monday. That compares with months of waiting for taxpayers who are victims of identity theft.
Underpromise, Overdeliver
The agency is trying to be careful and “underpromise and overdeliver,” said John Hewitt, founder and chief executive officer of Liberty Tax Service, part of JTH Holding Inc., based in Virginia Beach, Virginia.
The IRS has long delayed refunds to prevent fraud, Hewitt said. This year’s efforts, combined with an expected flood of returns because of late congressional action that delayed the start of filing, may slow refunds by about a week, he said.
The early surge of returns is expected to be so heavy that Liberty is keeping its offices open from 6 a.m. until midnight for the next week, Hewitt said.
Taxpayer identity theft has become more prevalent in the past few years. For fiscal 2012, the IRS’s identity-theft unit received about 450,000 cases, up 78 percent over the previous year, according to the National Taxpayer Advocate, an independent organization within the agency.
“You just wish your income earnings statements looked like the identity theft spike,” said Mark Steber, chief tax officer of Jackson Hewitt Tax Service Inc.
False Returns
Using Social Security numbers illegally obtained from sources such as doctors’ offices and payroll departments, criminals generate fake wage reports and false tax returns. They focus on the start of the tax-filing season, seeking to deposit refunds on a disposable debit card or convert them into cash before legitimate taxpayers file.
“It’s a lot easier and safer for a criminal to not use a gun and go out and rob a bank,” Goldstein said. “It’s much easier to use a computer and it’s safer for you.”
Steber said organized identity-theft rings will send one “prober” into a tax preparation office to test whether their fake documentation will succeed. If it does, they’ll quickly file up to 25 or 50 similar returns, spread over multiple tax- prep offices in the same city, sometimes claiming as much as $8,000 per return.
“There is no shortage of creativity,” he said.
Months Waiting
Taxpayers whose identities are stolen sometimes wait months for their refunds and go through what the National Taxpayer Advocate calls “a journey through IRS processes and procedures that may take years to complete.”
The advocate, members of Congress, the agency’s inspector general and watchdog groups have been calling on the IRS to do more to prevent refund fraud and assist victims.
In its annual report last year, the IRS Advisory Council said it was “concerned that both taxpayers and the tax system will suffer if appropriate measures are not taken quickly and effectively to control this fraud.”
It recommended that the IRS withhold three-quarters of refunds until it can verify taxpayers’ identities.
For some U.S. households, a tax refund is the biggest financial event of the year. In 2012, 74.4 percent of tax filers received refunds, which averaged $2,803.
Ann Esarco, a former member of the council, said the government should require W-2 wage reports to be filed sooner. The deadline for the reports is Feb. 28, creating a gap during which the IRS has difficulty matching information it receives from taxpayers with reports from employers.
‘Tighten’ Timeline
“Somehow we have to tighten that timeline,” said Esarco, an accounting instructor at McHenry County College in Crystal Lake, Illinois.
This year, the IRS is introducing more of what it calls filters to stop fraudulent refunds from being issued. Those are rules the agency’s computers use to analyze returns and determine whether they warrant more scrutiny. The IRS doesn’t disclose details to avoid giving criminals information.
“We have more of them in place this year and we’ve improved the quality of them,” Eldridge said, describing identity theft as a “top priority” for IRS. “As we get smarter, the identity thieves find ways to try new things.”
Esarco said the IRS is improving how it flags the returns of dead people who will need to have a final tax return filed for 2012.
Beth Tucker, a deputy IRS commissioner, told a congressional subcommittee last year that the agency was targeting bank accounts or addresses receiving multiple tax refunds.
Criminal Investigations
The IRS said it had more than 3,000 employees focused on identity theft in late 2012, more than double the number a year earlier. Also, it said it has tripled the number of criminal investigations of identity theft and begun sharing information with local law enforcement agencies in nine states.
Taxpayers who think they are the victims of identity theft can contact the IRS at 1-800-908-4490, extension 245.
Eldridge, the IRS spokeswoman, said identity theft cases are particularly complex to resolve.
“We know that this is frustrating for victims,” she said. “We have been able to take some steps to try to close those quicker, but it’s still not quick enough.”
