The Internal Revenue Service found over 245,000 identity theft incidents last year, according to a new government report that assessed the IRS’s efforts to stem the growing problem, as victims testified before the Senate.

Since 2008, the IRS has identified 470,000 incidents of identity theft affecting more than 390,000 taxpayers. The thieves typically steal, or attempt to steal, the victim's tax refund.

In a new report, by the Government Accountability Office, the GAO acknowledged that the hundreds of thousands of taxpayers with tax problems caused by identity theft represent a relatively small percentage of the expected 140 million individual returns filed, but for those affected, the problems can be extremely serious.

The report was presented during a hearing Wednesday of the Senate’s new Subcommittee on Fiscal Responsibility and Economic Growth.

“Victims of tax-related identity theft are the casualties of a system ill-equipped to deal with the growing proficiency and sophistication of today’s tax scam artists,” said Sen. Bill Nelson, D-Fla., who chairs the newly formed subcommittee during its first hearing Wednesday.

He noted that taxpayer victims can spend countless hours obtaining the necessary documents to prove who they are. “Inconsistent messages and conflicting instructions from customer service agents at the IRS can worsen the situation,” Nelson added. “Innocent taxpayers whose identities have been stolen frequently find themselves in a confusing and frustrating form of bureaucratic ping-pong.”

National Taxpayer Advocate Nina Olson told the committee that the IRS has made numerous improvements over the past several years to assist identity theft victims. However, she added, “despite these changes, we are seeing unprecedented levels of identity theft casework.” She noted that the IRS Identity Theft Protection Specialized Unit is struggling to effectively manage identity theft cases, and the population of taxpayer accounts with an identity theft indicator has grown significantly, subjecting almost a million accounts to business rules.

One identity theft victim who testified before the committee, Sharon Hawa of the Bronx, N.Y., said she had become an identity theft victim for the second time in three years after thieves twice filed tax returns in her name and received tax refunds. The first time it happened was in 2009 after she visited her local tax preparation office, as she had for the past five years, to file her 2008 taxes. Two days after the tax return was electronically filed, she received a phone call from the tax preparer’s office saying her refund had been rejected by the IRS with an error code saying the SSN had been used more than once to file a return.

“I felt extremely scared and anxious not knowing how else my identity may have been violated so I immediately took measures to secure all of my personal assets and accounts and followed the steps that the tax office suggested I take as they acknowledged this happened to some of their other clientele the same year,” she said.

She obtained a police report, filed it with the Federal Trade Commission, and mailed in a hard copy of her tax return to the IRS. After submitting numerous letters and making numerous phone calls to the IRS, each time having to painstakingly prove her identity to the agency over a 14-month period, she was finally assigned a taxpayer advocate whom she described as “incredibly rude and difficult to reach, which only added to the stress and frustration of the entire situation.”

She had to re-submit all of her paperwork to the IRS and take on a second job to make up for the money she didn’t have when her tax refund didn’t show up. But she also had to take time off from work to make all the phone calls and write all the letters to the IRS. While the 2010 tax season brought her fresh anxiety, her tax refund was not stolen that year. The following year, however, it was stolen again by identity thieves.

Identity theft harms innocent taxpayers through employment and refund fraud, the GAO report noted. In refund fraud, an identity thief uses a taxpayer's name and Social Security number to file for a tax refund, which the IRS discovers after the legitimate taxpayer files.

In employment fraud, an identity thief uses a taxpayer's name and SSN to obtain a job. When the thief's employer reports income to the IRS, the taxpayer appears to have unreported income on his or her return, leading to enforcement action.

The IRS has taken multiple steps to resolve, detect, and prevent employment and refund fraud, the GAO noted. The IRS will mark taxpayer accounts to alert its personnel of a taxpayer's identity theft. The purpose is to expedite the resolution of existing problems and alert personnel to potential future account problems.

The IRS also screens tax returns filed in the names of known refund and employment fraud victims, and the IRS provides taxpayers with information to increase their awareness of identity theft, including tips for safeguarding personal information. The IRS has also started providing identity theft victims with a personal identification number to help identify legitimate returns.

However, the GAO noted that the IRS's ability to address identity theft issues is constrained by a number of factors. Privacy laws limit the IRS's ability to share identity theft information with other agencies. Another problem is the timing of the IRS’s fraud detection efforts. More than a year may have passed since the original fraud occurred. The resources necessary to pursue the large volume of potential criminal refund and employment fraud cases are another constraint on the IRS’s efforts. In addition, the GAO acknowledged the burden that stricter screening would likely cause taxpayers and employers since more legitimate returns would fail such screening.

One identity theft victim whose handbag was stolen at a gas station declined to reveal her identity in her testimony before the Senate. She had her identity used multiple times by tax refund thieves, despite the identity theft indicator on her account. She testified about her frustrations in dealing with the bureaucracy.

"It's really a pity to finally realize that after I was robbed, every step of the system has failed in solving my case or to protect myself and my family from ID theft," she said.

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