Death Master File — Analysis — IRS Filters Really Work!

When presented graphically, the data reflected in the Charts quantifying the impact of the IRS Filters shared in the previous blog entry demonstrate patterns that are both clear and encouraging.

IRS Fraud $

Although scattered incidents of fraudulent tax returns involving identity theft were reported over a decade ago, their frequency and magnitude prior to 2010 could be said to fall within the noise level on the IRS radar.  The emphasis within the IRS and on Capital Hill was to expedite refund payments to the point that checks were being issued within days of electronic filing early in the filing season and well before the IRS would have received information returns that would be used months later to verify the accuracy of the data on the return justifying a significant refund.  Instead of taking steps designed to prevent improper payments, the IRS practice as 2011 began was to pay claimed refunds as quickly as possible and then chase the filer in a labor intensive effort to recover the fraudulent or otherwise improper payment.

As stories began to make headlines during 2011 of thieves filing fraudulent tax refund claims abusing the SSNs of recently deceased children, the public was made to realize that the harm being perpetrated was no longer just a manageable drain on the Treasury.  The disruption and pain inflicted upon the grieving parents (the legitimate taxpayers) for them felt like losing their child all over again.  The IRS was prompted to revisit the wisdom of continuing the “pay and chase” approach to correcting improper payments to possible identity thieves.  Prevention of fraudulent payments became a new focus of their enforcement efforts.

The comparison between the TY 2010 and TY2011 experience confirms the assertion that the IRS enforcement policies changed in December of 2011 to institute practices intended to prevent improper payments by diverting suspicious returns for further scrutiny before they were processed for payment.  The first year impact of this change in policy was dramatic, especially where the SSN of a deceased individual had been abused.


IRS Fraud Cases

Note:  12 Jan 2016 — Please expect additional materials to be added to this blog post in the next few days developing the implications of the data that has only become available well after the issue first became the focus of Congressional attention.  The initial narrative surrounding the situation suggested that the problem lay with the ready public availability of deceased person’s SSNs in the DMF, and that a simple fix would result by limiting access to the DMF.  I continue to assert that the real problem rose from the incredible vulnerability of the IRS online filing system and, in their haste to expedite the payment of refunds, the failure of the IRS  during 2011 to use the DMF [ listing, as it does, the no-longer-active SSNs of deceased persons]  or other filters to flag suspicious returns.  The effectiveness of the post-December 2011 IRS enforcement efforts is praiseworthy.


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