IRS Slows Down Refunds to Flag Questionable Ones
The IRS is fighting identify theft and fraudulent tax refund claims. Essentially the IRS is slowing down questionable refunds by adjusting their culture of speed of adopting the mantra of when in doubt don’t let t out (the refund).
January 17 2012 was the most used filing date for fraudulent tax returns, and unfortunately the IRS typically assumes that the first tax return filed is the correct one. They understand the fallacy of this assumption, and are taking several steps to help taxpayers.
This is written testimony of Steven Miller, Deputy Commissioner for Services and Enforcement of the IRS before the Senate Committee on Finance on March 20 2012-
Fighting identity theft will be an ongoing battle for the IRS and one where we cannot afford to let up. The identity theft landscape is constantly changing, as identity thieves continue to create new ways of stealing personal information and using it for their gain. We at the IRS must continually review our processes and policies to ensure that we are doing everything possible to minimize the incidence of identity theft and to help those who find themselves victimized by it.
And yet there is a delicate balance here. We cannot manually inspect 100 million refunds to ensure all are correct – nor is there any justification for doing so. That is neither practical nor in keeping with Congressional intent. The IRS has a dual mission when it comes to refunds, particularly when they are generated in whole or in part by tax credits. Refundable and other tax credits are provided to achieve important policy goals, such as relieving poverty or boosting the economy. The IRS must deliver refunds in the intended time frame, while ensuring that appropriate controls are in place to minimize errors and fraud. We must balance the need to make payments in a timely manner with the need to ensure that claims are proper and taxpayer rights are protected.
Tax filings can be affected by identity theft in various ways. For example, an identity thief steals a legitimate taxpayer’s personal information in order to file a fake tax return and attempt to obtain a fraudulent refund. There are also instances where the identity stolen is of an individual who is deceased or has no filing requirement.
Overall, IRS identified and prevented the issuance of over $14 billion in fraudulent refunds in 2011. Identity theft is a subset of this overall refund fraud. Since 2008, the IRS has identified more than 460,000 taxpayers who have been affected by identity theft. These are taxpayers who have filing requirements and who are or may be impacted by the theft. With respect to these taxpayers, in calendar year 2011, the IRS protected $1.4 billion in refunds from being erroneously sent to identity thieves. This does not include identity theft of those without a filing requirement (though that value is included in the above $14 billion). The IRS is committed to improving its approaches to blocking these fraudulent refund claims. To that end, we strive to process returns in such a way that potentially false returns are screened out at the earliest possible stage.
Identity theft is a key focus of an IRS program launched in 2011. Under this program, the following improvements have been made:
- Various new identity theft screening filters are in place to improve our ability to spot false returns before they are processed and before a refund is issued. For example, new filters were designed and launched that flag returns if certain changes in taxpayer circumstances are detected. It must be noted that effective filters are difficult to develop given the number of changes that many taxpayers experience in a year. For example, annually 10 million of us move and 46 million of us change jobs. Thus, changes in taxpayer circumstances do not necessarily indicate identity theft. Nonetheless, as of March 9, 2012, we have stopped 215,000 questionable returns with $1.15 billion in claimed refunds from filters specifically targeting refund fraud.
- Moreover, this filing season, we have expanded our work on several fraud filters which catch not only identity but other fraud. In this area we have stopped roughly as much so far this filing season as we stopped last calendar year. Until we work these cases we will not have a solid answer as to how much of this work is fraud, but not identity fraud, but we suspect a great deal may fall into the latter category.
- We have implemented new procedures for handling returns that we suspect were filed by identity thieves. Once a return has been flagged, we will correspond with the sender before continuing to process the return.
- We are issuing special identification numbers (Identity Protection Personal Identification Numbers or IP PINs) to taxpayers whose identities are known to have been stolen, to facilitate the filing of their returns and prevent others from utilizing their identities. The use of IP PINs is more fully described below, but we issued over 250,000 for this filing season.
- We have accelerated the availability of information returns in order to identify mismatches earlier, further enhancing our ability to spot fraudulent tax returns before they are processed.
- We are leveraging mechanisms to stop the growing trend of fraudulent tax returns being filed under deceased taxpayers’ identities. First, we have coded accounts of decedent taxpayers whose SSNs were previously misused by identity thieves to prevent future abuse. Second, we are identifying returns of recently deceased taxpayers to determine if it is the taxpayer’s final return, and then marking accounts of deceased taxpayers who have no future filing requirement. So far this filing season, 66,000 returns have been stopped for this review. Third, we are working with the Social Security Administration in order to more timely utilize the information SSA makes available to us. And we are working with SSA on a potential change to the practice of routine release of the Death Master File.
- We have also developed procedures for handling lists of taxpayers’ personal information that law enforcement officials discover in the course of investigating identity theft schemes or other criminal activity. This is extremely valuable data that can be used to flag taxpayer accounts and help us block returns filed by identity thieves who have used the personal information of these taxpayers. Our Criminal Investigation (CI) division will utilize this data to ensure linkages are identified between criminal schemes and will also ensure that the information is shared appropriately to affect victim account adjustment and protection activity.
- We expanded the use of our list of prisoners to better utilize the list to stop problematic returns. We have stopped 135,000 questionable returns this filing season. For the fiscal year, we have prevented almost $800 million in refunds representing an 80% increase in refunds stopped over the same period last year. We received additional help under the United States-Korea Free Trade Agreement Implementation Act passed last year that requires federal and state prisons to provide information on the current prison population. We are engaging with prison officials to determine the best way to move forward with this new authority. Unfortunately, the news is not all good. The authority allowing us to share return information with prisons expired at the end of 2011.
- We are also collaborating with software developers, banks, and other industries to determine how we can better partner to prevent theft.
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