Internal Revenue Service Commissioner John Koskinen met with the heads of some of the major tax software companies, tax preparation chains, state tax commissioners and other officials in an effort to combat the growing problem of identity theft and tax fraud.

The group included H&R Block president and CEO Bill Cobb; Intuit president and CEO Brad Smith; Liberty Tax Service president and CEO John Hewitt; Thomson Reuters Tax & Accounting managing director of the professional segment Jon Baron; Rhode Island Tax Administrator David Sullivan, who is also president of the Federation of Tax Administrators; Drake Tax Software CEO Phil Drake; CEO Timur Taluy; Green Dot CEO Steve Streit; and Wolters Kluwer Tax & Accounting CEO Karen Abramson. Representatives from the Free File Alliance and CERCA, the Council for Electronic Revenue Enhancement, were also in attendance.

They agreed to form three working groups—overview, technology and information sharing—to work on issues such as taxpayer authentication, identity theft prevention and analysis.

“All of us have been concerned about identity theft and refund fraud for years,” Koskinen told reporters Thursday during a press conference following the meeting. “While we’ve made important progress during the past few years, we all remain deeply concerned about that issue and particularly its impact on taxpayers. The IRS has made it a priority to help victims of identity theft stop refund fraud before it occurs, and criminally pursue people who inflict this terrible crime on taxpayers.”

Koskinen noted that he and the others plan to take further steps. “We met today because we all recognize that we need to do even more as the criminal element continues to get more and more sophisticated in their efforts,” he said. “They are continually working to stay one step ahead of us, and our goal is not just to catch up, but get ahead of the problem and ahead of the criminal syndicates. We need to do more to protect taxpayers, and we need to do more to protect the tax system. Whether in government or the private sector, we all have a role in tackling this problem head on, and that’s why we’ve gathered today.”

[IMGCAP(1)]During the two-hour meeting, the participants exchanged views and ideas on ways to control the growing problem. “It’s clear from that discussion that we’re all committed to stopping the fraud and that everyone in this room is committed to doing whatever it takes to combat the threat to taxpayers,” said Koskinen. “We agreed to work today to increase the collaboration among all of the organizations represented at the meeting to make our systems and filters stronger both in the private and the public sector. We also agreed that we want a level playing field across the industry so that there’s a united front which will create a powerful deterrent effect against fraud. We also agreed to focus on additional information sharing and authentication efforts to protect the integrity of tax returns.”

The three working groups will build on the work that’s been done in the past by the IRS, state tax administrators and technology companies. They plan to focus on steps that can be implemented for next filing season and hope to come up with recommendations by this summer to give tax software companies and preparers time to adjust their systems.

“This is a long-term effort and the challenges continue to morph and change almost on a monthly basis,” said Koskinen. “We’ve agreed that we also need to begin to focus on what are the longer-term solutions that can’t necessarily be implemented by the next filing season, but need to be put in place as soon as possible. The reality of the technology and the complications of filing season are that anything that’s going to affect the next filing season needs to be designed, tested and developed by this summer, so the goal of the working groups is to report back out to this broad steering group in time for that to happen. Not only the IRS and the states, but the software developers and the preparers themselves, need the same lead time if we’re going to make this work. The end result is going to be to protect honest taxpayers and help reinforce public trust in the tax system.”

Block and Intuit
H&R Block CEO Bill Cobb agreed that the issue is critically important. “For any CEO in almost any business this is a critical issue that we all have to take very seriously,” he said. “We all have a common enemy. We talked about that a lot today when we talked specifically about stolen identity refund fraud. We have been increasingly more vigilant over the years. This tax season has been no different. If anything, it certainly has been heightened, so this is high on our priority list. I think all the other CEOs will agree that this is of paramount importance because of what we’ve seen, whether it’s in this industry or others. It’s very important, and we are spending everything we can to try to fight these criminals.”

The group did not specifically address the challenges that Intuit faced earlier this tax season when it halted TurboTax filings after several state tax commissioners noticed suspicious activity (see Intuit Temporarily Halts State E-Filing Amid Fraud Concerns). But Intuit CEO Brad Smith said the issue goes deeper than one company.

[IMGCAP(2)]“Most people are aware now that we’re living in a very different time than we were even 12 months ago,” he said. “The data suggests that in 2013, 13 million people in the U.S. had their identities stolen. In 2014, it was over 100 million. That information, matched up with social media information, gives a lot of bad actors a lot of information to do bad things. So as a result of that, we’ve been able to take steps that I think the consumers are much more aware of now, things that will continue to act in their best interest, some more stringent security measures, things that we’ve always done in the past when we saw a symptomatic occurrence and now we’re doing it literally for everyone. And I think that the consumers are accommodating that because they recognize that it’s in their best interest and it gives us the catalyst to continue to push forward and be progressive as a collective industry, and with the states and the federal government as well.”

Smith pointed out that identity theft and data breaches are also happening outside the tax industry.

“The consumer understands that this isn’t a specific individual or company, that this is a systemic issue,” he said. “They see it showing up in lots of different places, whether it’s their retail stores or other places, so what they want to know is what can they do to protect themselves and what are we doing as an industry or as a company to protect them as well. That’s the place we’re all collectively in now is the education process.”

[IMGCAP(3)]Cobb pointed to recent studies that H&R Block has conducted that found support among consumers for additional steps that would protect their tax refunds from identity thieves (see Taxpayers Ready to Do More to Fight Tax Fraud). “We just released a study this week that we had done last year and repeated it this year in which the consumers said they were willing to do more to combat tax fraud,” said Cobb. “People understand, as Brad said, this is a serious issue. The taxpayers are willing to take additional steps, and we talked about this in the meeting today, in order to be protected as they fill out their returns. I think the data is clear that consumers are aware of it, taxpayers are aware of it, and they’re willing to aid industry in trying to fight this. As the Commissioner said, it’s a traumatic experience.”

Smith noted that TurboTax is already using security measures such as multifactor authentication, adding that the questions have to be the type that can’t be answered by an identity thief using social media. Getting the W-2 and 1099 information downloaded automatically from a third-party source such as a payroll provider or bank also helps authenticate a user. “Therefore we have a high level of certainty to make sure you are who you say you are,” he said.

Cobb pointed to techniques such as device IDs and ID proofing, but admitted that the tax prep industry lags behind other industries such as the mortgage-financing sector in authenticating customers. “If you get a mortgage these days, you have to answer questions based on your previous tax return,” he said.

The participants in the talk said they were committed to taking specific steps at the preparer level and the transmitter level.

Koskinen said it would be helpful to get W-2 information earlier to be able to verify the tax returns. “Clearly any third-party data and authentication we can get at the front end helps a lot,” he said.

Tax Preparer Training
Koskinen also said he would like to see better training of tax preparers. “We are concerned about preparers who are not well trained and who either make mistakes, which is one problem, but the real problem is crooks who are out there consciously filing false returns, encouraging … people to show up, and then the next thing you know, they’ve signed a blank tax return and the refund money disappears.”

He wants Congress to give the IRS the authority to require a certain minimum level of training. “You have to work harder to become a barber than a tax preparer,” said Koskinen. “That doesn’t seem quite like the right balance.”

Koskinen is not as concerned with the abilities of reputable tax preparation firms as with fly-by-night operators.

“One of the major concerns we have is that there are a lot of tax preparers out there, not accredited with anybody, with no training, no experience, who will just hang out a shingle and say come with us, we’ll get you a great refund, even though you know you’re not entitled to a great refund,” he said. “But that’s a different level of professionalism in the industry. The vast majority of preparers are as concerned about authentication as we are.”

However, budget cuts at the hands of Congress have forced the IRS to slash its technology budget, Koskinen noted, so the agency has less money to spend on developing more sophisticated filters to combat identity theft. The IRS needed to redirect some of its other funds to administer laws like the Affordable Care Act and the Foreign Account Tax Compliance Act, or FATCA.

Debit Cards
Koskinen was asked by Accounting Today about whether the IRS is considering stopping the use of debit cards as a way to receive tax refunds, since they have proven to be a popular way for many identity thieves to steal the refunds. But Koskinen said the debit cards are needed by many taxpayers who lack bank accounts.

“We’ve actually had a good working relationship with the debit card industry, which is anxious as you can imagine not to be identified with a business that is significantly involved with criminals or fraud, and they’ve been very cooperative,” said Koskinen. “Well over 90 percent of debit cards are used by honest taxpayers and honest Americans. It’s not a question of saying we’re not going to use them. And for the unbanked, of which there is a reasonable percentage of the population, it’s the only efficient way for them to get refunds, other than a check, and for a lot of them, if they don’t have a bank account, cashing a check is problematic. So like a lot of things that we deal with, it’s not an on/off switch."

Instead, the IRS has been working with the debit card industry on distinguishing refunds sent to debit cards as opposed to bank accounts. "Over the last couple of years, we’ve had very constructive and productive discussions with the debit card industry," said Koskinen. "They’ve been working with us so we can identify as one of our filters when a debit card is being used. Historically differentiating between a debit card account and a bank account was not [something] we could do, and now we have much more capacity to do that. So at this point, I don’t think it would be productive for us to say, well, now once we can identify what they are, we’re just not going to provide any refunds on a debit card. We have across the board this year noted that we will not put into either a bank account or a debit card more than three electronic refunds, and beyond that the refunds go out in paper.”

Koskinen noted that the IRS has also been stopping more suspicious tax returns this year than it has in the past and sending out more letters to taxpayers asking for additional authentication when it suspects a filing may be fraudulent.

Delaying Tax Refunds
Although the participants in the meeting Thursday did not discuss the idea of delaying tax refunds beyond tax season to ensure that they are valid, the question did come up at a congressional hearing Wednesday on appropriations for the IRS. Koskinen pointed to H&R Block’s survey indicating that taxpayers would be tolerant of a slight delay in getting their refund to make sure someone else didn’t get their refund.

“People might be more willing to deal with that today than they were in the past,” said Koskinen. “We are sensitive to the issue, but particularly for low-income taxpayers, the refund check or the EITC payment may be the largest payment that they get all year. A lot of them rely on it to pay that month’s rent or other issues.”

However, he pointed out that historically the IRS used to send out tax refunds after filing season. If it went back to doing that, taxpayers would eventually adjust to the different timing.

“We are taking a look at everything to try to figure out what’s the most effective way to protect taxpayers and deal with this issue,” said Koskinen. “To the extent that we can get W-2’s and other information earlier, it would help us significantly. If we can get those by the end of January, it might mean that refunds didn’t go out until sometime in the middle or in the latter part of February, so there might be a smaller delay. My sense is that even for people who depend on it, there’s a one-year shift from February to March, or February to April. Then if they get used to always getting their check in April rather than February, most people would rather do that than become one of the victims of identity theft and refund fraud.”

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