Identity Theft—The IRS’s number one problem

by Paul R. Tom Myths and FAQs, Taxes and the IRS, Zeiders Law Firm Blog

When a thief steals an individual’s identity, the thief can ruin the individual’s credit, drain the individual’s bank accounts AND fool IRS into giving the thief a large tax refund.  Identity theft refund fraud (“IDT refund fraud”) has grown exponentially over the last several years, creating a boon for crooks and a multi-BILLION dollar headache for IRS.  IRS estimated for a recent Government Accountability Office Report that identity thieves stole almost $6,000,000,000 in 2013, but IRS admits that its estimate only includes the fraudulent refund claims IRS knows about.

The good news about this chart is that according to IRS 81% of IDT refund fraud is either prevented or the money is recovered.  The bad news is this:

  • IRS almost never catches IDT refund fraud in time to simply reject the fraudulent return and prevent the fraud.
  • The GAO Report is based on IRS’s estimates of the number of IDT returns.  IRS’s estimates appear to be unrealistically low.  Surprise, surprise.
  • IRS has admitted that there is undiscovered IDT refund fraud, but IRS has no idea how much.  Neither IRS nor GAO estimated the amount of undiscovered IDT refund fraud, but I’d bet it’s over 10 billion.
  • IDT refund fraud is a relatively easy crime to commit. The identity thief doesn’t need to know how to program or hack into a computer or how to prepare a complex tax return.  The thief just has to have the victim’s name, address, date of birth and SSN and the thief has to know how to E-file a simple 1040-EZ return.
  • IRS almost never matches the information shown on the IDT return to the actual W-2 or 1099 information before IRS pays the refund to the identity thief.
  • IRS has been combatting ID refund theft by the “pay and chase” method – IRS pays the refund to the ID thief, and then chases the fraudster down to get the money back.

No wonder the IDT refund scam is so successful.  We are 15 years into the 21st century, and IRS is still using outdated, imprecise analog tools to fight a high tech digital war.

But fear not fellow taxpayer, IRS says things will definitely change for the better in 2016.  I have my doubts.  Beginning with the 2015 return filing season (~01/20/2016 — ~04/15/2016), IRS will begin a “pilot program” to prevent IDT refund fraud.  IRS will partner with some of the larger payroll processing firms (ADP, Intuit, etc.) and place a 16 digit alpha numeric code randomly on some of the employees’ W-2s.  The return preparer will then input the 16 digit code on the electronic return, and the IRS can match the W-2 to the return.  Sounds good in theory, but this pilot program has accountants and preparers howling about delays, input errors and more aggravating and costly red tape.

I tend to agree with the preparers’ complaints.  A sixteen digit secret code won’t prevent IDT refund fraud.  Input errors, delays and aggravation will crash the pilot program before it gets off the ground.  In my opinion, the only way to prevent this multi-billion dollar scam is to require ALL employers (every single one) to submit employee W-2 wage and withholding information and 1099 contractor payments information on or before January 20 of the following year.  This will allow IRS to match the income and withholding information to the taxpayer’s filed return before IRS pays out a dime in refunds.  No W2 or 1099 information on file or no match between the tax return and the employer information = no refundIt’s simple and effective, and that’s the ONLY way IRS can stop this rampant theft of our money.