Combating IRS Refund Fraud: The Next Profile in Courage?

The continuing vulnerability for the IRS online filing system to refund fraud by identity theft has been much in the news in recent days.

It was the focus of the CBS 60 Minutes broadcast Sunday evening, the 21st of September which featured interviews ranging from the fourth IRS commissioner in the last two years, film clips from the Congressional testimonies of his predecessors, and “expert” testimony from a former identity thief.

http://www.cbs.com/shows/60_minutes/video/RzmZGQTr7RPHG2pfxMj4ufrsdTRnQXPd/biggest-irs-scam-around-identity-tax-refund-fraud/

The broadcast also anticipated the public release on Monday, the 22nd of September of a Governmental Accountability Office (GAO) Report responding to a request from key members of Congress entitled:  “Identity Theft –  Additional Actions Could Help IRS Combat the Large, Evolving Threat of Refund Fraud.”

http://www.gao.gov/products/GAO-14-633

What GAO Found

Based on preliminary analysis, the Internal Revenue Service (IRS) estimates it paid $5.2 billion in fraudulent identity theft (IDT) refunds in filing season 2013, while preventing $24.2 billion (based on what it could detect). The full extent is unknown because of the challenges inherent in detecting IDT refund fraud.

“IDT refund fraud takes advantage of IRS’s “look-back” compliance model. Under this model, rather than holding refunds until completing all compliance checks, IRS issues refunds after conducting selected reviews. While there are no simple solutions, one option is earlier matching of employer-reported wage information to taxpayers’ returns before issuing refunds.”

Three years after this issue burst into the headlines in 2011, newly available data is finally prompting decision-makers to begin asking the right questions and focus on possible solutions that reflect reality.

Contrary to the original impressions flowing from reports of the identities of recently deceased children (possibly obtained by using the Social Security Administration’s Death Master File) being used to file fraudulent tax refund claims, subsequent analysis confirms that such cases never represented more than a miniscule part of the vulnerability to tax refund fraud. The Treasury Inspector General for Tax Administration report issued in September 2013  analyzing TY 2011 data set the percentage at less than 2% of the total dollars fraudulent paid, and an even smaller percentage of the total number of cases.  (Note Figure 4 in the report.)  http://www.treasury.gov/tigta/auditreports/2013reports/201340122fr.pdf

It is my hope that TIGTA plans to follow up on the above review of our TY 2011 experience by developing comparable numbers for TY 2012 and TY 2013 so that we can assess the effectiveness of the measures already taken to intercept fraudulent returns.

I will soon supplement this report with additional commentary on RPAC responses to this issue.  Please check back in the next day or so..

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