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IRS vs. ID thieves: Crooks winning

By Kay Bell · Bankrate.com
Thursday, April 25, 2013
Posted: 2 pm ET

When it comes to identity thieves vs. the Internal Revenue Service, the crooks have the edge. For now.

That was the consensus at a recent congressional hearing examining what the Senate Special Committee on Aging calls an epidemic of identity theft among seniors and other taxpayers.

Why the focus on older Americans? Because many of them aren't required to file a tax return. If a person relies solely on Social Security benefits, that money isn't taxed. Even if they supplement their golden years' earnings, as long as the amount doesn't exceed a certain threshold, it's not taxable, meaning they don't have to worry about reporting it to Uncle Sam.

Since these senior citizens don't have to file a return, they are often unaware that their identities have been stolen to file fraudulent tax returns, Treasury Inspector General for Tax Administration J. Russell George told the Senate hearing.

And that's where the Catch-22 comes in. If the individuals don't report the ID theft, there's no way for the IRS to know the returns are fraudulently filed. The agency typically doesn't learn about falsely filed returns until the real taxpayers submit the correct, but duplicate, 1040 forms.

So the fake tax refunds are paid out to the criminals. And that means taxpayer dollars are lost.

Increasing tax ID theft

Tax identity theft has continued to increase among all taxpayers, not just older folks. In 2011, the IRS identified more than 1 million such instances. As of Dec. 31, 2012, the IRS reported almost 1.8 million tax ID theft cases.

The 2012 number includes approximately 280,000 cases brought to the IRS' attention by taxpayers who reported they were victims of identity theft. Mores than 1.5 million ID theft incidents were detected by the IRS as potential identity theft.

George told senators that because of the delay in the start of this year's filing season, his office has yet to compile data or compare trends. "However, it is highly likely that incidents of identity theft will show a continued increase when the current filing season is concluded," he said.

IRS ramps up efforts

The inspector did offer one bit of positive news on federal efforts to combat tax identity theft.

In late March, the IRS announced it was expanding a program designed to help law enforcement nationwide obtain tax return data for their investigations and prosecutions of specific cases of identity theft. It's a continuation of a pilot program started in April 2012 in Florida that gave state officials the ability, via a written disclosure consent waiver from the victim, to obtain tax returns filed using the victim's Social Security number.

The pilot was expanded in October 2012 to eight additional states -- Alabama, California, Georgia, New Jersey, New York, Oklahoma, Pennsylvania and Texas. Now such tax information sharing is available in all 50 states and the District of Columbia.

Prosecution of ID thieves will help. Prevention is better.

The IRS says it's working on that, too.

In an op-ed piece in USA Today following the Senate hearing, Deputy Commissioner of the IRS Beth Tucker cited some of the agency's efforts. Among them are security filters used in processing returns. She says the agency's efforts have "already blocked 2 million suspicious returns."

Federal funds key

That's a good start. Here's hoping that Congress will do its part and make sure the IRS has the funding it needs to keep these programs in place and add more as needed to keep identity thieves' hands off our tax returns.

That's not just my wish. TIGTA's George told lawmakers the same thing.

"Without the necessary resources, it is unlikely that the IRS will be able to work the entire inventory of potentially fraudulent tax returns it identifies," he said. "The net cost of not providing the necessary resources is substantial, given that the potential revenue loss to the federal government of these tax fraud-related identity theft cases is billions of dollars annually."

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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."

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2 Comments
Sonia
April 29, 2013 at 9:46 pm

I file my tax as early as I possibly can to lower my own risk.
I like the pin idea from John - but maybe the pin should have to match the pin from the employer. If there is no match, it would be an easy red flag.

john
April 27, 2013 at 6:14 am

Suggestions:
1. Delay all refunds until after Apr 15th.
2. Follow the money and prosecute.
3. Pin numbers to authenticate.
4. Better comparison on other supporting documents(w2, 1099).

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