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IRS Beefs Up Safeguards to Prevent Refund Fraud

Oct 20th 2015
Staff Writer and Editor AccountingWEB
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With the 2016 tax season right around the corner, the IRS said on Oct. 20 that a public-private sector partnership is “breaking new ground” in the fight against identity theft refund fraud.

The agency, along with state tax administrators and tax industry leaders, have identified and tested more than 20 new data elements on tax return submissions that will be shared with the IRS and states to help detect and prevent identity theft-related filings during this upcoming tax season.

In addition, tax software providers are putting in place enhanced identity requirements and validation procedures for their customers to protect accounts from identity thieves, according to the IRS. This includes the creation of security questions and device-identity recognition at the time of log-on – steps currently being used in the financial sector.

“This unprecedented partnership continues to put strong new safeguards in place for the 2016 tax season. We are breaking new ground in the battle against identity theft,” IRS Commissioner John Koskinen said. “Taxpayers will have more protection than ever when they file their tax returns.”

How to stop identity theft refund fraud has been a major issue confronting the IRS and the tax-preparation community this year. Several instances of fraudsters obtaining private taxpayer data illegally and filing bogus tax returns have made headlines. Most notably, the IRS admitted in May that its “Get Transcript” web application was breached, resulting in the Social Security numbers and other data of 114,000 taxpayers being stolen by thieves to file fraudulent returns. In August, the IRS said an additional 220,000 taxpayers could be impacted by the breach.

The public-private sector partnership began in March and culminated in the development of several recommendations in June between the IRS, leaders of tax-preparation and software firms, payroll and tax financial product processors, and state tax administrators. Some of those recommendations included:

  • Reviewing the transmission of the tax return, including the improper and or repetitive use of the IP address from where the return originates, as well as reviewing the time it takes to complete a tax return so computer-mechanized fraud can be detected.
  • Sharing aggregated analytical information about filings with the IRS to help combat identify fraud.
  • Establishing a formalized Refund Fraud Information Sharing and Assessment Center to more aggressively and efficiently share information between the public and private sectors to help stop fraud schemes and reduce the risk to taxpayers.
  • Aligning with the IRS and states under the National Institute of Standards and Technology cybersecurity framework to promote the protection of IT infrastructure.

“We are taking new steps upfront to protect taxpayers at the time they file and beyond,” Koskinen said on Tuesday. “Thanks to the cooperative efforts taking place between the industry, the states, and the IRS, we will have new tools in place this January to protect taxpayers during the 2016 filing season.”

To date, 34 state departments of revenue and 20 tax industry members have signed memorandums of understanding regarding roles, responsibilities, and information sharing, with more expected to sign later, according to the IRS.

As part of this effort, members from the IRS, states, and industry are co-chairing and serving on several teams. The teams have focused on a number of areas, including:

  • Improved validation of the authenticity of taxpayers and information included on tax return submissions.
  • Increased information sharing to improve refund fraud detection and expand prevention.
  • Sophisticated threat assessment and strategy development to prevent risks and threats.

“Protecting taxpayers and strengthening the integrity of the US tax system is a team effort, and the progress we've made over the past eight months demonstrates our shared commitment to fight fraud,” Intuit Inc. CEO Brad Smith said in a written statement. “Cooperation between government and industry is both essential and unprecedented. Together, we're creating new ways to further validate taxpayers' identities and the information they submit. Sharing what we've learned will strengthen the system and give taxpayers greater confidence when they file returns.”

Bill Cobb, president and CEO of tax-preparation company H&R Block, said even though the partnership has taken several positive steps to prevent refund fraud, a lot of work still needs to be done.

“We are three months away from the opening of tax season 2016. While we know that these steps will make a significant improvement, we also are not so naïve as to think that it will entirely eliminate tax identity/tax refund fraud,” he said in a written statement. “This is a multiyear journey of continuous change and improvement. We must establish clear milestones and hold ourselves as a working group accountable to real progress.”

Related articles:

IRS Announces Collaboration to Fight Identity Theft Tax-Refund Fraud
IRS Shows Mercy to Victims of Data Breaches

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