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A Mixed Bag Regarding the IRS and Identity Theft

Jun 3rd 2015
Columnist
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There was both good news and bad news last week for the IRS on the identity theft front.

First the good: According to a report released by the Treasury Inspector General for Tax Administration (TIGTA) on May 28, the IRS has improved its detection and prevention of identity theft tax return fraud, which has plagued the nation’s tax-collection agency in recent years.

Now the bad: Two days before that report was released, the IRS was forced to reveal the existence of a massive security breach involving its “Get Transcript” application. The IRS admitted that the personal information of about 100,000 American households was exposed in the scheme, which is being investigated by the IRS Criminal Investigation Unit, TIGTA, and the FBI, among others.

Thus, this appears to be a case of two steps forward, one step back for the IRS.

The TIGTA report released last week is a follow-up to a 2013 report, which found that the IRS issued $3.6 billion in potentially fraudulent tax refunds in 2011. For the new report, TIGTA analyzed data from 2012 tax returns to determine the effectiveness of continued IRS efforts to thwart identity theft when tax returns are being processed.

Although the results provide a ray of hope, the ability of the IRS to stem the tide remains limited because it doesn’t gain access to third-party income and withholding information until well after tax return filing begins. The agency continues to lobby for legislation that would accelerate and expand its access to data as an aid to detection efforts.

According to the latest report, TIGTA was able to identify 787,343 potentially fraudulent tax returns, with tax refunds totaling more than $2.1 billion, that had the same characteristics as IRS-confirmed identity theft tax returns. Also, TIGTA’s analysis identified multiple tax returns with the same address and/or bank accounts that were not identified by the IRS’s cluster-filtering tool.

In addition, TIGTA found that Individual Taxpayer Identification Numbers (ITINs) continued to be used to file potentially fraudulent tax returns. It identified more than 140,000 tax returns for 2012 that were filed by individuals using an ITIN with the same characteristics as IRS-confirmed identity theft tax returns. These tax returns resulted in approximately $375 million in potentially fraudulent tax refunds being issued.

Treasury Inspector General J. Russell George noted the IRS has recognized that new identity theft patterns are constantly evolving. This means it must constantly stay on top of its game.

“Undetected tax refund fraud results in significant federal outlays and erodes taxpayer confidence in the federal tax system,” George said in a written statement.

TIGTA recommended that the IRS continue to evaluate clustering filters to ensure that it properly identifies tax returns with multiple uses of addresses and/or bank accounts; expand identity theft filters to address filing patterns that may indicate a tax return is related to identity theft; and outline specific actions and time frames for implementation of a process to deactivate ITINs assigned prior to Jan. 1, 2013, including ITINs assigned to individuals who are now deceased.

For its part, the IRS agreed with TIGTA’s recommendations and plans to continue evaluating identity theft-related fraud trends and review fraud filter performance to improve its clustering process. It also expects to develop an action plan to deactivate ITINs.

But these actions can’t completely remove the sting of the agency’s latest black eye.

Related article:

TIGTA Reports Examine IRS Identity Theft Processes, Services

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