Taxpayers whose identities are stolen receive confusing and conflicting instructions from the Internal Revenue Service and delays of up to a year before their tax problems are resolved, according to a new report.

The report, released Tuesday by the Treasury Inspector General for Tax Administration, coincided with a congressional hearing on the problem of identity theft and tax fraud (see IRS and Social Security Urged to Curb Tax Fraud and Identity Theft).

TIGTA conducted its review because of significant recent growth in tax-related identity theft cases and reports of problems that taxpayers are encountering with the IRS when attempting to resolve their cases.  As of Dec. 31, 2011, the IRS's Incident Tracking Statistics Report showed that 641,052 taxpayers have been affected by identity theft in calendar year 2011 (compared to 270,518 in 2010). The growth in these cases has overwhelmed IRS resources and burdened taxpayers.

TIGTA found a number of problems with the way the IRS is handling identity theft cases. The IRS does not work on identity theft cases on a timely basis and can take more than a year to resolve them, according to the report. Communications between the IRS and victims are limited and confusing, and victims are asked multiple times to substantiate their identity.

When taxpayers call the IRS to advise the agency that their electronic tax return was rejected because it appears another individual has already filed a tax return using their identity, the IRS instructs them to mail in a paper tax return with the Form 14039, Identity Theft Affidavit, attaching supporting identity documents. However, the IRS has been processing these tax returns using standard processing procedures and does not prioritize them.

Identity theft guidelines and procedures are dispersed among 38 different Internal Revenue Manual sections. These guidelines are inconsistent and conflicting, and not all functions have guidelines on handling identity theft issues. In addition, the IRS makes little use of the data from identity theft cases to spot trends that could be used to detect or prevent future refund fraud.

“TIGTA found that the IRS’s current methods for handling identity theft cases are insufficient and taxpayers deserve better,” said TIGTA Inspector General J. Russell George in a statement. “As the Federal Trade Commission has reported that identity theft continued to be the number one consumer complaint last year, and the most common form of reported identity theft involves government documents, the IRS must make handling these cases a priority.” George also testified Tuesday at the congressional hearing.

TIGTA recommended that the IRS establish accountability for the identity theft prevention program, and implement a process to ensure that IRS notices and correspondence are not sent to the address listed on the identity thief's tax return. The IRS should also conduct an analysis of the letters sent to taxpayers regarding identity theft; and ensure taxpayers are notified when the IRS has received their identifying documents. The IRS also needs to create a specialized unit in the Accounts Management function to exclusively work identity theft cases; and ensure all quality review systems used by IRS functions and offices working identity theft cases are revised to select a representative sample of identity theft cases, TIGTA recommended.

TIGTA also suggested that the IRS revise procedures for the Correspondence Imaging System screening process; and ensure that its programming is adjusted so that identity theft issues can be tracked and analyzed for trends and patterns.

The IRS agreed with all of TIGTA's recommendations.  It has established a governance structure to oversee its identity theft initiatives and plans to expand its identity theft indicator codes identifying claims of identity theft. The IRS further plans to review its suite of identity theft letters and to update its guidance instructing employees to notify taxpayers acknowledging receipt of documentation. The IRS currently has specialized units in the Accounts Management function working only identity theft cases. Finally, the IRS plans to create a specific quality review for identity theft cases and is currently evaluating options for enhancing its ability to track and analyze the fraudulent identity theft information removed from a taxpayer account.

“Over the past few years, the IRS has seen a significant increase in refund fraud schemes in general and schemes involving identity theft in particular,” wrote Rebecca Chiaramida, director of privacy, governmental liaison and disclosure at the IRS, in response to a draft version of the report. “To address this growing problem, we developed a comprehensive identity theft strategy that is focused on both fraud prevention and victim assistance. In doing so, we are working to ensure future instances of such crime are minimized and the tax filing issues of innocent victims are resolved quickly and in a courteous manner.”

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