The Internal Revenue Service currently has no corporate strategy to combat identify theft, according to the Treasury Inspector General for Tax Administration. Until it adopts an agency-wide strategy, it will be unable to help taxpayers and the government combat what TIGTA calls "the growing threat" of identity theft and support the prosecution of offenders.
The inspector general leveled the charges in a new final audit report. In a memorandum accompanying the report, Pamela J. Gardiner, Treasury deputy inspector general for audit, called identity theft one of the fastest growing crimes in the United States.
"The reports of fraudulent tax returns as a percentage of the type of fraud committed by identity thieves almost doubled from calendar years 2002 (1.9 percent) to 2003-2004 (3.7 percent)," she stated.
The TIGTA report cited two studies completed in July 2003 by Gartner Inc. and Harris Interactive, to the effect that there were approximately seven million victims of identity theft in the prior 12 months.
Gardiner cited two primary types of identity theft that related to tax administration: "The first type involves an individual using another person's identity (name and Social Security number) to file a fraudulent tax return to steal a tax refund. The second type involves using another person's identity (name, SSN or both) to obtain employment. This frequently involves undocumented workers," she said.
The individual committing the first type of fraud frequently files the fictitious tax return electronically early in the filing season, according to the report. When the individual whose identity was stolen files his return later, the IRS matching process identifies the second return as a duplicate and freezes it, including any tax refunds due. The legitimate taxpayer must then prove that he is a victim of identity theft, and the issue must be fully resolved before the victim can obtain any refund that may be owed.
In the second type of identity theft, a person uses someone else's Social Security number to obtain employment. When the Form W-2 information is received from the Social Security Administration, the IRS performs a match of the SSN and the name on the W-2 to agency records. If a mismatch is found, the IRS issues a notice to the victim proposing an assessment of additional taxes owed relating to underreported wages, when in fact the victim did not underreport her income. Again, the burden is on the victim to prove that she is a victim of identity theft.
Neither type of theft is new, according to Robert Siciliano, chief executive of Boston-based IDTheftSecurity.com. "When a Social Security number is compromised for employment reasons, you're looking at 30 to 40 different people using that number. When illegal aliens get a Social Security number, it gives them the opportunity to get a job. They generally communicate that Social Security number to their friends and family, as well."
If the theft is left unchecked, a victim's life can be profoundly affected, said Siciliano. "As the identity thief continues to use that Social Security number and becomes more comfortable with it, they generate additional documents with the victim's name. They're essentially living the life of the ID theft victim, and over time they will accumulate drivers' licenses, birth certificates, credit cards and bank accounts in the victim's name. Once this happens, things spin out of control."
"It's identity cloning," said Jay Foley, co-executive director of the San Diego-based Identity Theft Resource Center. "I live and work as if I'm you, I'm just not doing it in your neighborhood. I filed first, so not only do I get my money back, I get yours too. Either way you're not happy when you have the IRS on your doorstep saying that you owe additional funds, or the refund you expected didn't come in because some else got it."
The TIGTA faulted the IRS for having no corporate strategy to address identity theft issues.
"The IRS does not have a consistent process to educate and assist taxpayers, and, although the IRS works toward resolving duplicate tax return and underreporting situations, it does not always take additional actions to deal with the individuals that have used another's name or SSN to file fraudulent tax returns or obtain employment," the inspector general said. "In addition, the IRS does not have comprehensive or centralized data on identity theft to determine the effect identity theft has on tax administration."
Not ready for the challenge?
This happened because the IRS has not developed a corporate strategy to address the growing significance of identity theft and its effect on tax administration, according to the inspector general.
"Until the IRS develops an agency-wide strategy, it will be unable to help taxpayers and the federal government combat the growing threat of identity theft and assist criminal law enforcement's efforts to prosecute offenders."
"We butt our heads with the IRS on a regular basis on this," he said. "The problem for the victim is to get through to someone in the IRS structure that can deal with identity theft. The people you talk with are prepared to tell you how to do and pay your taxes, but they're not prepared to deal with this type of problem. We generally go through the Taxpayer Advocate, but when tax time rolls around they beef up their staff with part-time people who don't have the full range of training."
"The people you need to talk to are fraud investigators," he added, "and they're looking for people who are defrauding the government, for example by claiming children who don't exist. They're not looking for the fact that someone filed your taxes with your Social Security number because they've been working under that number all year."
Identity cloning is done for a number of reasons, Foley said. "People who are not entitled to be or work in the country illegally use it to stay here and work. Those who need to hide from a previous identity - for example, convicted felons - use it. And someone trying to hide from child-support payments or a long stream of bad credit will find it attractive."
Some identity theft is understandable, "although it's still illegal," said Foley. "Sometimes a person will use it to hide from a violent spouse or avoid a stalker."
The audit compared identity theft to the Earned Income Tax Credit, for which the IRS has successfully developed a corporate strategy and agency-wide approach. "The IRS recognized that numerous functions dealt with different aspects of the EITC, a credit the IRS had identified as having a significant rate of noncompliance. To better understand the causes and develop solutions, the IRS formed a Project Office to develop policy and procedures in an attempt to consistently deal with the issue."
Specifically, the TIGTA said that it would recommend five steps to be taken by the deputy commissioner for services and enforcement:
* Ensure that agency-wide communication tools are updated to include information about identity theft;
* Ensure that information provided by the IRS to taxpayers or for use by other federal government agencies when referring individuals to the IRS is complete and accurate;
* Develop agency-wide standards to ensure consistency when requiring taxpayers to substantiate claims and when allowing taxpayers future exemptions and credits;
* Develop specific closing codes for cases involving identity theft; and,
* Develop an enterprise identity theft strategy that includes processes to identify instances of identity theft and to resolve identification number discrepancies.
It recommended that the IRS strategy include processes to begin to resolve the identification number discrepancies that totaled 7.9 million for Forms W-2 in the 2002 tax year. It noted that the IRS does not currently have a program that attempts to resolve the identification number mismatches or to enforce tax laws relating to withholding and filing issues.
"We're going to have to address identity theft as a nation and, for the IRS, on the organizational level," said Foley. "The IRS will have to work in a cohesive manner to address it. Until then, everything they do is wasting time and resources."
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