The Internal Revenue Service met Thursday with tax preparation and software companies, payroll and tax financial product processors, and state tax administrators to announce a sweeping new collaborative effort to combat identity theft refund fraud and protect taxpayers.

The agreement—reached after the project was originally announced March 19—includes identifying new steps to validate taxpayer and tax return information at the time of filing. The effort will increase information sharing between industry and governments. There will be standardized sharing of suspected identity fraud information and analytics from the tax industry to identify fraud schemes and locate indicators of fraud patterns. And there will be continued collaborative efforts going forward.

“As recent events have underscored, the need to protect tax return information and our data systems has never been more important,” Koskinen said during a press conference Thursday. “Any organization in the public or private sectors with IT systems and sensitive data faces a battle that seems to grow every day. The nation's tax system is no different. That's why the work of the group gathered here today is so critical. The tax system faces an unprecedented challenge, but the tax industry, the states and the IRS have responded with a remarkable collaborative effort that holds short-term and long-term promise to improve the protection of the nation's taxpayers.”

The IRS believes the agreement represents a new era of cooperation and collaboration among the IRS, states and the electronic tax industry that will help combat identity theft and protect taxpayers against tax refund fraud. "We've made tremendous progress, and we will continue these efforts," said Koskinen. "Taxpayers filing their tax returns next filing season should have a safer and more secure experience."

He convened an earlier Security Summit on March 19 with the CEOs and leaders of private sector companies and federal and state tax administrators to discuss emerging threats on identity theft and expand existing collaborative efforts to stop fraud (see IRS Meets with Tax Community to Address Identity Theft).

Three specialized working groups were established as part of the summit, with members from the IRS, states and industry co-chairing and serving on each team. During the past 12 weeks, the teams focused on developing ways to validate the authenticity of taxpayers and information included on tax return submissions, information sharing to improve detection and expand prevention of refund fraud, and threat assessment and strategy development to prevent risks and threats.

New Initiatives

The groups agreed to several important new initiatives in this unprecedented effort, including:

* Taxpayer authentication: The industry and government groups identified numerous new data elements that can be shared at the time of filing to help authenticate a taxpayer and detect identity theft refund fraud. The data will be submitted to the IRS and states with the tax return transmission for the 2016 filing season. Some of these issues include, but are not limited to:

• Reviewing the transmission of the tax return, including the improper and or repetitive use of Internet Protocol numbers, the Internet ‘address’ from which the return is originating.

• Reviewing computer device identification data tied to the return’s origin.

• Reviewing the time it takes to complete a tax return, so computer mechanized fraud can be detected.

• Capturing metadata in the computer transaction that will allow review for identity theft related fraud. 

* Fraud identification: The groups agreed to expand sharing of fraud leads. For the first time, the entire tax industry and other parts of the tax industry will share aggregated analytical information about their filings with the IRS to help identify fraud. This post-return filing process has produced valuable fraud information because trends are easier to identify with aggregated data. Currently, the IRS obtains this analytical information from some groups. The expanded effort will ensure a level playing field so everyone approaches fraud from the same perspective, making it more difficult for the perpetration of fraud schemes.

* Information assessment: In addition to continuing cooperative efforts, the groups will look at establishing a formalized Refund Fraud Information Sharing and Assessment Center (ISAC) to more aggressively and efficiently share information between the public and private sector to help stop the proliferation of fraud schemes and reduce the risk to taxpayers. This would help in many ways, including providing better data to law enforcement to improve the investigations and prosecution of identity thieves.

* Cybersecurity framework: Participants with the tax industry agreed to align with the IRS and states under the National Institute of Standards and Technology (NIST) cybersecurity framework to promote the protection of information technology infrastructure. The IRS and states currently operate under this standard, as do many in the tax industry.

* Taxpayer awareness and communication: The IRS, industry and states agreed that more can be done to inform taxpayers and raise awareness about the protection of sensitive personal, tax and financial data to help prevent refund fraud and identity theft. These efforts have already started, and will increase through the year and expand in conjunction with the 2016 filing season.

Working with Industry and States

"Industry, states and the IRS all have a role to play in this effort," Koskinen said. "We share a common enemy in those stealing personal information and perpetrating refund fraud and we share a common goal of protecting taxpayers. We want to build these changes into the DNA of the entire tax system to make it safer.”

Intuit CEO Brad Smith was one of the participants in the summit Thursday. “Today marks an important milestone in a multi-step journey for government and industry to work together to drive fraud out of the U.S. tax system,” Smith said in a statement. “We applaud this new set of security standards and data protocols that create a strong foundation for deepening the partnership between IRS, the states and industry. What makes this process so effective, and these outcomes so encouraging, is the collaboration and contribution from the entire tax ecosystem.”

Smith, whose company needed to temporarily suspend tax filings earlier this season when state tax administrators detected a wave of suspicious filings coming from identity thieves, told reporters that the tax industry is working with the IRS to fight a common enemy. “We’re at the dawn of a new era of active collaboration between the IRS, the states, as well as the industry, and we are fighting together a common enemy, to stop this threat on the U.S. tax system, and the harm it causes to its victims, which are the U.S. taxpayers that we all serve,” said Smith.

H&R Block CEO Bill Cobb also spoke to reporters and gave his kudos to the IRS and its team. “Sometimes the image isn’t always the best, but IRS has been fair, they’ve been relentless, they’ve been involved, and I know the commissioner himself has been directly involved with all the working groups, and that means a lot when the person at the top gets so involved, and it’s reflected in the work,” he said.

“We want to instill confidence in taxpayers that this industry has moved to a level that is similar to online banking, that they’re going to be secure as they sign in as their account, and we’ll do everything we can to not allow fraudsters in there," said Cobb. "I would also add that what we’re asking Congress for is the ability to license tax preparers. Unscrupulous tax preparers are a problem in the industry. It is up to Congress to do the licensing. In this country, there are 50 states that license people who cut hair, but there are only four states that license people who prepare taxes, and that’s an outrage.”

Many major system and process changes will be made this summer and fall by the participants in order to be ready for the 2016 filing season. The public-private partnership also will continue this cooperative, collaborative approach to address not just short-term issues but longer-term issues facing the tax community and taxpayers.

The partnership parties recognize the need to continuously improve our tax system defenses for combating this threat to taxpayers and our tax system, Koskinen added. Those defenses include a continually improving multi-level identity proofing and authentication capability that anticipates and stops threats.

"I applaud the industry and the states for stepping forward to take on this challenge and making the needed changes," Koskinen. "This is good for taxpayers, good for tax administrators and good for the tax community."

Koskinen emphasized that a continuing theme throughout this effort focuses on protecting taxpayer information and privacy. “Working together we can achieve results that none of us, working alone, could accomplish,” he said.

In addition to companies from the private sector, the summit team included several groups including the Electronic Tax Administration Advisory Committee, the Federation of Tax Administrators representing the states, the Council for Electronic Revenue Communication Advancement and the American Coalition for Taxpayer Rights.

“Tax fraud is real, and we have seen the effects in states in the past few years,” said David Sullivan, president of the Federation of Tax Administrators and Tax Administrator of Rhode Island. “We stress at the FTA, in order to have a comprehensive plan, the states need to be involved every step of the way, and we have been.”

Getting Ready for Next Tax Season

“Everyone needs to understand that our collaborative efforts won’t end with the actions we’re taking to get ready for the upcoming filing season,” Koskinen pointed out. “The IRS and its partners will continue to work together to address longer-term issues facing the tax community and taxpayers in the efforts to combat stolen identity refund fraud. We want to ensure that we make lasting changes. These changes are being built into the DNA of the entire tax system.”

Koskinen said the IRS is now dealing with a much more sophisticated enemy than in the past. “It’s clear that criminals have been able to gather increasing amounts of personal data as the result of ongoing data breaches at various sources outside the tax system,” he said. “That means protecting taxpayers is a bigger challenge than ever before. While we have stopped many individuals from participating in these crimes, we find that the type of criminal we are dealing with has changed. This problem has become something more than just random individuals stealing personal information, with each one filing a few dozen or maybe a few hundred false tax returns at a time. We are dealing more and more with organized crime syndicates here and around the world.”

He pointed to the data breach that occurred in the IRS’s Get Transcript application. “Nothing illustrates this point better than the recent unauthorized attempts to access taxpayer information through our Get Transcript application, which we discovered last month,” he said. “There, the criminals had already accumulated significant, stolen information about taxpayers from other sources which allowed them, in some cases, to access previous individual tax return information.”

Congress's Role

Koskinen also asked Congress to provide more funding for the IRS, although House Republicans released a budget Wednesday that would once again cut the agency's budget.

“In the battle against refund fraud, we observed another thing as the Security Summit groups worked,” said Koskinen. “This partnership can make immediate progress, but the IRS, the industry and the states cannot solve this problem alone. We need help. Congress has an important role to play. Adequate funding to the IRS is critical. But just as importantly, Congress can help in the fight against refund fraud and identity theft by passing several legislative proposals we’ve already made. One of the most important of these would accelerate the due dates of third-party information returns, such as W-2s. This would allow us to match these documents against income tax returns earlier in the tax filing process—and help us more quickly spot errors and potential fraud.”

The leaders of the Senate’s main tax committee, Senate Finance Committee chairman Orrin Hatch, R-Utah, and ranking member Ron Wyden, D-Ore., welcomed the IRS announcement. “Over the past five years, we’ve seen a significant uptick in tax refund fraud. Fake returns have put victims’ identities at risk and every taxpayer suffers as their hard-earned dollars fall by the wayside and into the hands of fraudsters,” they said in a joint statement Thursday. “This must stop. The steps announced by the IRS today are a move in the right direction. However, the devil’s in the details, and we will be carefully monitoring how the new agreements are carried out to ensure taxpayers are being adequately protected and whether additional legislation is needed to protect taxpayers.”

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