Refund Fraud Delays Innocent Taxpayers’ Refunds

Refund fraud can stem from identity theft when an identity thief uses a  legitimate taxpayer’s name and Social Security Number (SSN) to file a  fraudulent tax return seeking a refund. Employment Fraud Exposes Innocent Taxpayers to Enforcement Actions for Unreported Income

Employment fraud occurs when an identity thief uses a taxpayer’s name  and SSN to obtain a job. After the victim files his or her tax  return, IRS matches income reported by the victim’s employer and the  thief’s employer to the tax return filed by the legitimate taxpayer, as  shown in figure 2. IRS agreed with our recommendations to address these and  other issues. IRS Has Taken Multiple Steps to Resolve, Detect, and Prevent Employment and Refund Fraud

In 2004, IRS developed a strategy to address the problem of identity theft– related tax administration issues. According to IRS, the strategy has  evolved and continues to serve as the foundation for all of IRS’s efforts to  provide services to victims of identity theft and to reduce the effects of  identity theft on tax administration. Identity theft indicators speed resolution by making a  taxpayer’s identity theft problems visible to all IRS personnel with account  access. Indicators also alert IRS personnel that a future account problem may be  related to identity theft and help speed up the resolution of any such  problems. Detection. IRS also uses its identity theft indicators to screen tax returns  filed in the names of known refund and employment fraud victims. Prevention. IRS’s Ability to Address Identity Theft Issues Is Constrained by Law, Timing, and Resources

		Privacy and Other Laws Limit IRS’s Coordination with Other Agencies and Taxpayers

IRS’s initiatives to address identity theft are limited in part because tax  returns and other information submitted to and, in some cases generated  by, IRS are confidential and protected from disclosure, except as  specifically authorized by statute. Additionally, IRS has limited authorities to share  identity theft information with other federal agencies. By the time both the victim and  IRS determine that an identity theft incident occurred, well over a year  may have passed since the employment fraud. IRS Does Not Pursue Criminal Investigations in Every Case of Potential Refund and Employment Fraud because of Resource Priorities

IRS officials told us that IRS pursues criminal investigations of suspected  identity thieves in only a small number of cases. However, more restrictive screening will likely  increase the number of legitimate returns that fail the screenings (false  positives). IRS provides taxpayers with  targeted information to increase their awareness of identity theft, tips and  suggestions for safeguarding taxpayers’ personal information, and  information to help them better understand tax administration issues  related to identity theft. This is a work of the U.S. government and is not subject to copyright protection in the  United States.
Why GAO Did This Study

Identity theft is a serious and growing problem in the United States. Taxpayers are harmed when identity thieves file fraudulent tax documents using stolen names and Social Security numbers. In 2010 alone, the Internal Revenue Service (IRS) identified over 245,000 identity theft incidents that affected the tax system. The hundreds of thousands of taxpayers with tax problems caused by identity theft represent a small percentage of the expected 140 million individual returns filed, but for those affected, the problems can be quite serious. GAO was asked to describe, among other things, (1) when IRS detects identity theft based refund and employment fraud, (2) the steps IRS has taken to resolve, detect, and prevent innocent taxpayers' identity theft related problems, and (3) constraints that hinder IRS's ability to address these issues. GAO's testimony is based on its previous work on identity theft. GAO updated its analysis by examining data on identity theft cases and interviewing IRS officials.

What GAO Found

Identity theft harms innocent taxpayers through employment and refund fraud. In refund fraud, an identity thief uses a taxpayer's name and Social Security Number (SSN) to file for a tax refund, which IRS discovers after the legitimate taxpayer files. In employment fraud, an identity thief uses a taxpayer's name and SSN to obtain a job. When the thief's employer reports income to IRS, the taxpayer appears to have unreported income on his or her return, leading to enforcement action. IRS has taken multiple steps to resolve, detect, and prevent employment and refund fraud: Resolve--IRS marks taxpayer accounts to alert its personnel of a taxpayer's identity theft. The purpose is to expedite resolution of existing problems and alert personnel to potential future account problems. Detect--IRS screens tax returns filed in the names of known refund and employment fraud victims. Prevent--IRS provides taxpayers with information to increase their awareness of identity theft, including tips for safeguarding personal information. IRS has also started providing identity theft victims with a personal identification number to help identify legitimate returns. IRS's ability to address identity theft issues is constrained by (1) privacy laws that limit IRS's ability to share identity theft information with other agencies; (2) the timing of fraud detection--more than a year may have passed since the original fraud occurred; (3) the resources necessary to pursue the large volume of potential criminal refund and employment fraud cases; and (4) the burden that stricter screening would likely cause taxpayers and employers since more legitimate returns would fail such screening.

What GAO Recommends

GAO makes no new recommendations but reports on IRS's efforts to address GAO's earlier recommendation that IRS develop performance measures and collect data suitable for assessing the effectiveness of its identity theft initiatives. IRS agreed with and implemented GAO's earlier recommendation.