Leaders of the Senate Finance Committee have introduced bipartisan legislation to improve protection for taxpayers against fraudulent tax refund claims made with stolen identities.
Sen. Orrin Hatch, R-Utah, ranking member of the Senate Finance Committee, and Ron Wyden, D-Ore., who chairs the Senate Finance Committee, introduced the Tax Refund Theft Prevention Act of 2014, S. 2736, on Thursday.
The bill includes new assistance for taxpayers who have been victims of identity theft and requires the Internal Revenue Service to establish a new security feature that individuals can use to protect their tax return filings.
“Tax refund fraud is a one-two punch for taxpaying individuals,” Hatch said in a statement. “Millions of taxpayers’ identities are compromised, and all taxpayers have their tax dollars wasted. Our bill aims to address such fraud by enhancing the IRS’s capabilities in detecting fraud and by giving victims the assistance and safeguards they need to repair the damage done by tax theft criminals. In order to further deter this crime, we make tax refund fraud a specific category of a felony offense and enhance security features for filers. Hard-working American families deserve a government that protects both their tax dollars and their sensitive taxpayer information. I am pleased Chairman Wyden has joined me in this advancing this effort.”
“We have to better protect lawful taxpayers from this nightmare issue,” Wyden said. “Earlier this year, I made it clear that taxpayer consumer protection must be at the heart of improving the American tax system. This bill offers a comprehensive, commonsense solution to a growing problem that will help prevent fraud and also provide assistance to those who have been victimized. Senator Hatch and I remain committed to protecting the integrity of our tax system.”
Under the bill, businesses would be required to report both employee compensation and certain non-employee compensation to the government earlier in tax season. The change would improve the IRS’s ability to identify and prevent fraudulent refund claims.
Paid tax preparers would be required to file individual income tax returns and most information returns electronically under the proposed legislation. In addition, the electronic filing requirement for preparers who file over 250 tax returns would be scaled back to 20 returns, over a three-year period, to improve the IRS’s ability to identify and prevent fraudulent refund claims.
The existing access that the Treasury Department has to the National Directory of New Hires database would be expanded for the purpose of identifying and preventing fraudulent tax filings and refund claims.
Victims of tax refund theft would be assigned a single contact person within the IRS for help with correcting their tax records and receiving their tax refunds.
Under the bill, the list of aggravated identity theft crimes that are classified as felonies would be expanded to include tax refund theft. Tax preparers would also face significant new penalties if they inappropriately disclosed taxpayer information in connection with an identity theft crime.
Individual taxpayers would be able to add password security to their tax filings under the legislation. If a tax return filer elected to add this security measure, then a valid tax return could not be filed without also using the correct password.
Under the bill, due diligence requirements imposed on tax preparers with respect to the Earned Income Tax Credit would be expanded to include a requirement that the preparer verify the tax filer’s identity. The senators’ office noted that many fraudulent returns falsely claim the EITC in order to generate a tax refund.
Under the proposed legislation, he IRS would be prohibited, with limited exceptions, from issuing multiple tax refunds to the same account or address. Annual tax statements received by employees for wages earned would be required to use a truncated Social Security number in order to protect the number from identity theft.