Leaders of the Senate Finance Committee sent a letter Monday to four federal service centers asking for clarification on reporting practices for federal employees’ wage and tax statements to the Social Security Administration and state tax agencies in order to safeguard against tax-related identity theft.

[IMGCAP(1)]Senate Finance Committee chairman Orrin Hatch, R-Utah, and ranking Democrat Ron Wyden, D-Ore., stressed in the letter how the information is crucial in securing accurate tax return filings and protecting against tax refund fraud. They sent the letter to the Agriculture Department's National Finance Center, the Pentagon's Defense Finance and Accounting Service, the Interior Department's National Business Center and the General Service Administration's National Payroll Branch.

“In recent years, identity-theft related tax refund fraud has grown to become an epidemic-level concern to both federal and state tax administrators,” Hatch and Wyden wrote. “State tax administrators are increasingly concerned that the federal government does an inadequate job of filing wage and withholding information with state tax agencies in a complete and timely manner. In light of the importance of this information in combating identity-theft related tax refund fraud, and recent reports that this information is often transmitted late, if at all, we write in an effort to better understand the federal government’s performance in this regard.”

They pointed out that the Federal Trade Commission reported tax-related identity theft as the number one consumer complaint, nearly doubling from 24.3 percent in 2011 to 43.4 percent in 2012. According to recent IRS estimates, the agency prevented $24.2 billion in fraudulent identity theft refund payments in 2013, but paid $5.8 billion that was later determined to be fraudulent.

“To prevent identity-theft related tax refund fraud, federal and state tax administrators (tax agencies) increasingly depend upon the timely receipt of information from Form W-2, the taxpayer’s Wage and Tax Statement, which gives tax agency officials information on a taxpayer’s actual wages and tax withholdings,” said Hatch and Wyden. “This information is critical in ensuring the accuracy of tax return filings and protecting against tax refund fraud. Unfortunately, because of differences between when tax agencies receive tax returns—and thus claims for tax refunds—and when they receive wage and withholding information from employers, tax agencies are pressed to issue tax refunds without having this critical piece of information. 

[IMGCAP(2)]Recent advances in information sharing between the IRS and state tax administrators aimed at jointly combating refund fraud make it all the more important that states have timely access to this data, they noted.

"In addition, when federal employers fail to provide tax agencies with wage and withholding information in a timely manner, federal employees are also at an increased risk of identity-theft related tax refund fraud and delays in receiving legitimate refunds, as the state tax agency is unable to tell whether a tax return is stating correct or fictitious wage and withholding information," they wrote. "Recent data breaches involving millions of federal employees heighten this concern.”

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