A new report from the Government Accountability Office suggests the Internal Revenue Service should increase its efforts to collaborate with the tax preparation industry and state tax authorities in the battle against identity theft and tax fraud.

The IRS estimates that fraudsters attempted to perpetrate at least $14.5 billion in identity theft tax refund fraud in tax year 2015. The IRS launched an Identity Theft Tax Refund Fraud Information Sharing and Analysis Center, also known as ISAC, as a pilot program for the 2017 filing season, an outgrowth of its Security Summit initiative, which began in March 2015. Through the summit, the IRS has partnered with state tax administrators and tax preparation companies and tax software providers on initiatives to prevent and detect identity theft and tax refund fraud.

The ISAC allows the IRS, states, and tax preparation industry partners to share information about such activity. The ISAC pilot includes two components: an online platform run by the IRS to communicate data about suspected fraud, and an ISAC Partnership, a collaborative organization made up of the IRS, states and industry, which functions as the governance structure. The ISAC currently has 48 members: 31 states (including full members and those receiving alerts only), 14 tax preparation companies, and three financial institutions. In addition, the IRS is using a Rapid Response Team in partnership with states and industry members to coordinate responses to identity theft refund fraud incidents that pose a significant threat within 24 to 72 hours of being discovered. The IRS deployed the Rapid Response Team for six incidents last year and once this year.

The GAO found that the ISAC pilot aligns with key aspects of all five leading practices for effective pilot design the GAO previously identified, but none aligns with those practices completely. For example, the IRS has worked to incorporate stakeholder input, but its message about the ISAC's benefits hasn’t fully reached the states. On top of that, the IRS doesn’t have criteria for assessing whether the pilot's objectives have been met. Without this assessment and better alignment with leading practices, the IRS, its partners and Congress will have difficulty determining the effectiveness of the pilot and whether to implement it more broadly, the GAO warned.

The IRS has taken actions to improve the ISAC pilot, the GAO acknowledged, but the ISAC Partnership lacks an outreach plan. While the ISAC Senior Executive Board limited industry participation to partners who participated in its Security Summit, the ISAC has obtained support from trade organizations. However, officials from nearly all the states represented in the GAO's focus groups noted they either had not used, or were unfamiliar with, the ISAC-specific resources. While the ISAC Board has taken steps to engage stakeholders, the ISAC Partnership doesn't have an outreach plan to increase membership and improve states' and industry partners' understanding of the ISAC's benefits. Without such a plan, less effective collaboration is likely among stakeholders, and opportunities to prevent IDT refund fraud may be missed.

The GAO recommended the IRS ensure the ISAC better aligns with leading practices for effective pilot design. It also said the ISAC Partnership should develop an outreach plan to expand membership and improve understanding of the ISAC's benefits. The IRS and the ISAC board state and industry co-chairs agreed with the recommendations.

Kiersten B. Wielobob, deputy commissioner for services and enforcement at the IRS, pointed to the success of the Security Summit initiatives. “In fact, the number of self-reported victims has declined by two-thirds over the past two filing seasons over the past two filing seasons, falling to 376,000 in 2016,” she wrote in response to the report. “Additionally the IRS stopped 883,000 tax returns with confirmed links to identity theft in 2016, a 37% drop from the year before. The declines stem in part from the first-of-its-kind partnership between the IRS, state tax agencies, major tax preparation companies and other tax industry participants.”

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Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.