The Internal Revenue Service’s ability to detect identity theft has improved, but billions of dollars were lost to criminals in 2011, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, acknowledged that expanded identity theft detection efforts at the IRS are helping to identify fraudulent tax returns. However, billions of dollars of potentially fraudulent refunds continue to be paid.
“Identity theft continues to be a serious problem with devastating consequences for taxpayers and an enormous impact on tax administration,” said TIGTA Inspector General J. Russell George in a statement Thursday. “Undetected tax refund fraud results in significant unintended Federal outlays and erodes taxpayer confidence in the Federal tax system,” he added.
TIGTA’s report follows up on a July 2012 report that found billions of dollars were being lost to identity theft in 2010. The new report’s objective was to determine whether the IRS has improved its procedures to identify and prevent fraudulent tax refunds resulting from identity theft.
TIGTA’s analysis of tax year 2011 returns found that approximately 1.1 million undetected tax returns that were filed using a Social Security Number have the same characteristics of IRS- confirmed identity theft tax returns. Potentially fraudulent tax refunds issued total approximately $3.6 billion in 2011, which is down by $1.6 billion compared to the $5.2 billion TIGTA reported for tax year 2010.
Problems identified by TIGTA in previous reports—notably, delayed access to third-party income and withholding information and multiple tax refunds deposited to the same bank account—continued to provide identity thieves with an opportunity to obtain fraudulent tax refunds in 2011.
In addition, TIGTA expanded its tax year 2011 analysis to include tax returns for which the primary Taxpayer Identification Number on the tax return is an Individual Taxpayer Identification Number. TIGTA identified more than 141,000 tax year 2011 tax returns filed with an ITIN that have the same characteristics as IRS- confirmed identity theft tax returns involving an ITIN. Potentially fraudulent tax refunds issued for these undetected tax returns totaled approximately $385 million.
Lastly, the IRS has still not taken actions to prevent multiple tax refunds from being deposited to the same bank account, TIGTA pointed out. This continues to provide identity thieves with an easy method to obtain fraudulent tax refunds.
TIGTA made two recommendations. IRS management agreed with TIGTA’s recommendations and stated its plans to take action.
IRS Response on Identity Theft Prevention
The IRS spokesperson also pointed out in a statement emailed to Accounting Today that it has made substantial improvement in recent years. “The constantly evolving tactics used by scammers to commit identity theft continues to be one of the biggest challenges facing the IRS, and we take this issue very seriously,” said the IRS. “As TIGTA’s [report] acknowledges, IRS efforts have increased our detection of fraudulent tax returns and prevented the issuance of billions of dollars in fraudulent refunds. The IRS has a comprehensive and aggressive identity theft strategy that focuses on preventing refund fraud, investigating these crimes and assisting taxpayers victimized by it. Given significant budget cuts, the IRS continues to balance and shift our limited resources as our work on identity theft and refund fraud continues to grow, touching nearly every part of the organization to better protect taxpayers and help victims. During 2013, the IRS has worked with victims to resolve more than 565,000 cases, three times more than the number of cases resolved at the same time last year.
“As TIGTA notes in its report, the cases selected and reviewed for this report do not reflect the numerous case processing improvements implemented for the 2013 filing season,” the IRS statement continued. “Over the past two years, we have continued to improve our processes and systems for helping identity theft victims and have considerably decreased the time it takes to resolve these complex cases. As a result of these process and staffing improvements, as well as enhanced prevention measures implemented for the 2013 filing season, the IRS is currently resolving most of the identity theft cases received this year within 120 days.
“Building on our past success in identifying potentially fraudulent tax returns, this year the IRS developed new identity theft screening filters and developed more sophisticated data models to detect emerging fraud patterns,” the IRS added. “As a result of these aggressive efforts to combat refund fraud, and specifically identity theft, since 2011, the IRS has stopped 12.6 million suspicious returns, and protected over $40 billion in fraudulent refunds.”
Case Processing Delays
In another report released by TIGTA on Thursday, TIGTA found that it took the Internal Revenue Service (IRS) an average of 312 days to resolve tax-related identity theft cases, according to a new report released by the Treasury Inspector General for Tax Administration (TIGTA) that studied a statistical sample of these cases.
This audit was a follow-up to a May 2012 identity theft audit report. The IRS reported that identity theft affected 1.2 million taxpayers in Calendar Year 2012, and an additional 1.6 million were affected in Calendar Year 2013, as of June 29, 2013.
“Identity theft is a growing epidemic, and I continue to be troubled by the lengthy case processing delays and tax account errors experienced by victims of tax-related identity theft,” said TIGTA head J. Russell George.
TIGTA’s review of a statistical sample of 100 identity theft cases closed between Aug. 1, 2011 and July 31, 2012 found that the IRS correctly determined the rightful owner of the Social Security Number in all cases. However, taxpayers faced delays, with some cases having significant inactivity during case processing. Inactivity on the 100 identity theft cases averaged 277 days. This is due, in part, to assistors being required to also answer telephone inquiries during the filing season.
In addition, tax accounts were not correctly resolved for 25 percent of the cases reviewed by TIGTA, resulting in delayed refunds and/or incorrect refunds to all 25 taxpayers. TIGTA surveyed 183 IRS assistors who work identify theft cases. Seventy-three percent of those surveyed stated that the IRS’s identity theft procedures are confusing.
Finally, TIGTA said the IRS needs to improve the accuracy of its Refund Fraud and Identity Theft Global Report. The IRS Accounts Management function’s open case inventory was overstated by 95,429 cases in the Calendar Year 2012 Global Report.
TIGTA recommended the IRS ensure that assistors assigned to identity theft cases work these cases exclusively and are provided with ongoing training and the ability to perform actions to work these cases to conclusion, develop clear and consistent processes and procedures to ensure that taxpayer accounts are correctly updated, and 3) develop validation processes and procedures to ensure the accuracy of information included in the Identity Theft Global Report.
The IRS agreed with TIGTA’s recommendations. It plans to continue to ensure that there are sufficient resources assigned to identity theft inventory and phones and that processes and procedures will be developed to ensure that all appropriate actions are taken on identity theft victims’ accounts. The IRS also plans to improve data collection and management.
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