The number of victims of employment-related identity theft is far larger than previously estimated and the Internal Revenue Service’s processes aren’t able to keep up, according to a new report.

Employment-related identity theft happens when a criminal uses someone else’s identity to get employment. Many taxpayers first learn they are victims when they get an IRS notice in the mail informing them about a discrepancy in the income reported on their tax returns.

A new report from the Treasury Inspector General for Tax Administration found the IRS failed to identify 497,248 victims of employment-related identity theft, even though criminals electronically filed tax returns with evidence showing they used the victims’ Social Security numbers to gain employment. These victims did not have an IRS tax account, and many were claimed as a dependent on a tax return filed by someone else.

Treasury Inspector General J. Russell George addressing a House subcommittee
Treasury Inspector General J. Russell George addressing a House subcommittee Bloomberg News

For another 60,823 victims, who do have an IRS tax account, the IRS didn’t update the account with the required employment identity theft marker. One reason is an IRS programming deficiency.

Without a tax account, the IRS can’t add the special marker indicating employment-related identify theft, and notifying those individuals would require the IRS to come up with some new procedures.

“Cases of employment identity theft can cause significant burden to innocent taxpayers, including the incorrect computation of taxes based on income that does not belong to them,” said TIGTA Inspector General J. Russell George in a statement.

The IRS has not set up an effective process to identify employment identity theft while processing paper tax returns, the report found. Based on its review, TIGTA estimates the IRS didn’t identify 272,416 victims of employment identity theft for the 685,737 paper tax returns filed by Individual Tax Identification Number holders reporting wages in processing year 2015. TIGTA also identified 16,597 individuals whose Social Security numbers and full or partial names were used by an ITIN holder to obtain employment, but the IRS did not notify the Social Security Administration that the income earned under the victim’s SSN was not earned by the victim. Every year, the IRS receives about 2.4 million tax returns filed using an ITIN with reported wages.

On Wednesday, the IRS announced it is now accepting renewal applications for ITINs that are set to expire in 2017, more than three months earlier than last year. Congress passed tax extenders legislation in December 2015 that also included a provision to control the use of illegal ITINs by making them expire. Under the PATH Act, ITINs that haven’t been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2017, and ITINs with the middle digits 70, 71, 72 or 80 will also expire at the end of the year. The IRS said affected taxpayers who expect to file a tax return in 2018 need to submit a renewal application.

TIGTA made 10 recommendations in its report, but IRS management agreed with only half of them. As a result, according to the report, actions are not being taken to assist 548,968 victims of employment identity theft.

TIGTA recommended the IRS 1) develop a process to notify the parents and legal guardians of dependents whose SSNs were misused; 2) correct its programming to ensure an identity theft marker is placed on all victims’ accounts for ITIN/SSN mismatches on electronically filed tax returns; 3) place the identity theft marker on the accounts of the 60,823 victims; 4) require ITIN paper tax return filers to attach Forms W-2 to their tax return; 5) develop procedures to identify employment identity theft on paper ITIN returns and add the identity theft marker on valid SSN owners’ tax accounts; 6) ensure the identity theft marker is placed on taxpayers’ accounts when the Taxpayer Identification Number Perfection unit determines an ITIN holder, rather than the taxpayer, earned the income on Forms W-2; and 7) develop a process to notify the Social Security Administration when ITIN/SSN mismatches involve an ITIN holder using a victim’s SSN and full or partial name to commit employment identity theft.

“Regardless of the type, the IRS takes IDT fraud very seriously and has expended substantial resources to identify and stop tax fraud and the victimization of innocent taxpayers when their personally identifiable information is misused,” wrote Kenneth C. Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Since February 2011, we have been identifying returns that reflect discrepancies between the wages self-reported by a taxpayer and wages attributed to the taxpayers as reported by an individual using that taxpayer SSN.”

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