Identity Theft Leads to Increased Taxpayer Refund Fraud

Another taxpayer’s Social Security Number is stolen – just one more case of identity theft. This time, the thief created a fake W-2, filed a fraudulent tax return, claimed a refund from the IRS, and received that refund by direct deposit to a debit card. A simple, efficient electronic fund transfer from the U.S. Treasury to a thief.

When do taxpayers learn their identity has been stolen? The fraud is often exposed when the taxpayer attempts to e-file a legitimate tax return only to discover it was already filed (by the criminal) and the refund already dispersed (to the criminal). Tax-related identity theft has been a problem for a long time, but the incidence of fraudulent tax refund claims has reached new heights.

FTC, IRS, DOJ, Congress, and TIGTA

In 2011, the top complaint to the Federal Trade Commission (FTC) was identify theft, with government benefits and documents fraud topping that list.

The IRS reported the incidence of identity theft tied to tax returns for last year – the number is staggering: 641,052 taxpayers were affected by thieves filing false tax returns in 2011 alone. In 2010, the number of taxpayer-victims of identity theft and false return filing reported by the IRS was 270,518. The statistics clearly show that tax-related identity theft is becoming more of a problem, not less.

Last January, the IRS teamed with the Department of Justice (DOJ) in a 23-state enforcement action representing an “unprecedented effort against identity theft,” according to the Commissioner of Internal Revenue Douglas H. Shulman. Because the security of their SSN’s is compromised, the IRS also created a special filing program for victims which provides protected taxpayer numbers for use on future returns.

The Treasury Inspector General for Tax Administration (TIGTA) audited the IRS after hearings and testimony before Congress on the difficulties victims encountered in attempting to get the IRS to correct their tax records. What is the legacy of stolen Social Security Numbers? Falsely filed tax returns, depletion of the U.S. Treasury, and misery for taxpayers forced to work through an inconsistent and conflicting IRS process.

National Taxpayer Advocate Weighs In

National Taxpayer Advocate (NTA) Nina E. Olson gave this conclusion in her May 8, 2012, statement before subcommittees of the U.S. House of Representatives:

“Identity theft poses significant challenges for the IRS… At a fundamental level, we need to make some choices about what we want most from our tax system. If our goal is to process tax returns and deliver tax refunds as quickly as possible, the IRS can continue to operate as it currently does – but that means some identity thieves will get away with refund fraud and some honest taxpayers will suffer harm. If we place a greater value on protecting taxpayers against identity theft and the Treasury against fraudulent refund claims, we may need to make a substantial shift in the way the IRS does business. Specifically, we may need to ask all taxpayers to wait longer to receive their tax refunds, or we may need to increase IRS staffing significantly. Under current circumstances, it is simply not possible for the IRS both to process legitimate returns rapidly and to combat identity theft effectively.”

The NTA believes addressing the problem of false refund claims will require important changes to the way theIRSapproaches tax-related identity theft in the future.

Protecting Yourself from Tax Identity Fraud

Protect your personally identifiable information and SSN by following these four recommendations:

1. Do not habitually carry your Social Security card on your person. If you lose your wallet or your purse is stolen, at least your SSN will not be readily available to the thief.

2. Do not respond to IRS-look-alike phishing emails. The real Internal Revenue Service never requests personal information from taxpayers via email.

3. Get a good paper shredder and use it to destroy documents containing your personally identifiable information. Never throw away financial documents in the trash without completely shredding first.

4. Make sure your tax preparer is thoroughly vetted before you surrendering your personal financial information. There have been cases of tax fraud and tax-related identity theft involving illegitimate tax preparers.