Procedures Need to Be Developed for Collection Issues Associated With Individual Taxpayer Identification Numbers
March 29, 2010
Reference Number: 2010-40-040
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Redaction Legend:
1 = Tax Return/Return Information
2(e) = Law Enforcement Procedure(s)
2(f) = Risk Circumvention of Agency Regulation or Statute (whichever is applicable)
Phone Number |
202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
March 29, 2010
MEMORANDUM
FOR
DEPUTY COMMISSIONER FOR OPERATIONS SUPPORT
COMMISSIONER, SMALL
BUSINESS/SELF-EMPLOYED DIVISION
COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Procedures Need to Be Developed for Collection Issues Associated With Individual Taxpayer Identification Numbers (Audit # 200940042)
This report presents the results of our review to determine whether the Internal Revenue Service (IRS) has procedures to effectively handle collection issues related to Individual Taxpayer Identification Numbers (ITIN).[1] This audit is included in the Treasury Inspector General for Tax Administration’s (TIGTA) Fiscal Year 2010 Annual Audit Plan and was conducted due to concerns raised by an IRS employee. This audit addresses the major management challenges of Taxpayer Privacy and Protection, Leveraging Data to Improve Program Effectiveness and Reduce Costs, and Providing Quality Taxpayer Service Operations.
Impact on the Taxpayer
Many tax returns
are filed by individuals who have used another person’s Social Security Number
or another person’s name and Social Security Number to work, but file Federal tax
returns using their own names and assigned ITINs. When collection actions are taken on the account of the legitimate holder
of the Social Security Number, tax complications can occur for both the
legitimate holder of the Social Security Number used by other(s) to work and
the individual who used another person’s
Social Security Number to work. Without collection procedures in place, taxpayers
cannot be assured that the correct actions are being taken to address their
issues.
Synopsis
An IRS employee contacted the TIGTA with
concerns about the lack of guidance available to resolve levy[2] issues associated with ITINs and individuals
who work using another person’s identity.
Individuals using another person’s Social Security Number to work were
having their wages attached by levies associated with the account of the
legitimate holder of the Social Security Number.
The following actions are not required and were not taken to ensure:
Guidelines should be updated to handle collection issues associated with ITINs. There are no internal guidelines that address what an IRS employee should do when an individual who used another person’s Social Security Number to work contacts the IRS to have a wage levy released.
Although this situation deals with the issue of a wage levy, other collection issues related to ITIN taxpayers could be presented to IRS employees. The IRS has not updated its internal guidelines to include collection issues related to identity theft and ITINs.
Further,
the IRS has no procedures for employees to initiate a process for notifying the
taxpayer whose Social Security Number has been stolen. Income matching and collection issues
associated with ITINs also present many challenges to tax administration. The IRS associates taxpayers with tax
records using a Taxpayer Identification Number, be it an ITIN, Social Security
Number, or Employer Identification Number.[4] Using the
Taxpayer Identification Number, the IRS matches income and wages from reporting
documents to taxpayers’ tax returns. Problems
occur when there are mismatches, such as the name does not match the assigned
Social Security Number, the taxpayer used a Social Security Number to work but filed
a tax return using an ITIN, or the taxpayer used an ITIN to work and report
wages and income.
From a
statistical sample of 96 records from a population of 551,108 Tax
Year 2007 returns:
·
4
records (4 percent) showed the taxpayer filed a tax return using an ITIN but
used another person’s name and Social
Security Number to work (possible instances of identity theft).
·
73
records (76 percent) showed the taxpayer used his or her name but another
person’s Social Security Number to work.
·
19 (20 percent) records that included Wage and Tax
Statements (Form W-2) could not be matched to any employers’ records.
The IRS stated there were almost 3 million Tax Year 2007 ITIN tax returns. Our analysis showed that about 1.2 million Tax Year 2007 ITIN tax returns reported wages earned by ITIN taxpayers using another person’s Social Security Number.
In addition, the IRS cannot currently identify cases created by ITIN taxpayers who used another person’s name and Social Security Number to work. This prevents the IRS from notifying the legitimate holder of the Social Security Number who may be the victim of identity theft.
Recommendations
We recommended that the Commissioners, Small
Business/Self-Employed and Wage and Investment Divisions, update internal
procedures and guidelines to ensure all collection issues are considered and
all required actions are taken to resolve the issues and establish a process to notify a taxpayer when there is evidence
that the taxpayer’s identity (name and Social Security Number) has been
compromised. In addition, the Deputy Commissioner
for Operations Support should develop a cross-referencing process to match ITIN
tax returns to the related reporting returns and develop a process to capture
data to determine potential identity theft victims.
Response
The IRS generally
agreed with our recommendations. The IRS
has begun taking steps to update its internal guidelines and has a process to
mark accounts of taxpayers who report they are victims of identity theft. The IRS disagreed with the assertion that it
does not have procedures to notify taxpayers when there is clear evidence of
identity theft. It states the Social
Security Administration has a program in place to request information from
individuals when there is a mismatch of Forms W‑2.
The IRS will
explore the feasibility of expanding the use of identity theft indicators and
notification processes where it has the capability and legal authority to do so
and where doing so would be beneficial to taxpayers. The IRS stated it has already begun
developing a process to match ITIN returns to their related reporting returns
and has procedures through the Electronic Fraud Detection System[5] to identify potential identity theft
victims. The IRS agreed to
explore the feasibility of a process to more broadly capture
data to determine potential identity theft victims. Management’s complete response to the draft report is included as
Appendix V.
Office of Audit
Comments
In its response to Recommendation
1, the IRS stated that all IRS functions have procedures in place to mark
accounts when taxpayers report they are victims of identity theft and provide
standard documentation. The IRS also stated it has a process in place to resolve account issues
for taxpayers who have been victims of identity theft. However, as we
reported, internal guidelines for Taxpayer Assistance Center
employees instruct them not to put an identity theft indicator on the taxpayer
account since the ITIN taxpayer (borrower) who came into the Taxpayer
Assistance Center is not the identity theft victim. Employees are also not instructed to forward
the case to the Identity Theft function so that it can place an identity theft indicator
on the account. Therefore, there is no
procedure in place to resolve the identity theft victim’s account when it is
not the identity theft victim who reported the problem.
In its response to Recommendation
2, the IRS stated that it currently marks the
accounts of taxpayers when it identifies, either through systemic processes or
through manual account review, that the taxpayer is a victim of identity
theft. It places an identity theft
marker on these accounts to streamline assistance for taxpayers and to help
mitigate future account problems. When
it marks these accounts, it also generates a notice to these victims informing
them that their information appears to have been compromised and of the steps
they can take to protect their identities.
However, as stated in the report, the IRS has no procedures for
employees to initiate a process for notifying taxpayers who may be unaware that
their Social Security Numbers have been stolen, as evidenced by the situation
we presented in the report. Functional
employees are not instructed to put an identity theft indicator on the account
of the victim or forward the case to the Identity Theft function when it is
other than the victim who has reported the identity theft.
Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services), at (202) 622-5916.
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix V
– Management’s Response to the Draft Report
Abbreviations
|
IRS |
Internal Revenue Service |
|
ITIN |
Individual Taxpayer Identification Number |
|
TIGTA |
Treasury Inspector General for Tax
Administration |
|
|
|
An Internal Revenue Service (IRS) employee
contacted the Treasury Inspector General for Tax Administration (TIGTA) with
concerns about the lack of guidance available to resolve levy issues associated
with Individual Taxpayer Identification Numbers (ITIN)[6] and individuals who work using another person’s
identity. Individuals using another
person’s Social Security Number to work were having their wages attached by
levies[7] associated with the account of the
legitimate holder of the Social Security Number. The employee was concerned that there were no
procedures on how to resolve the levy issue.
However, this situation presents additional
challenges to tax administration. For
example:
Identity
theft affects tax administration when an individual intentionally uses the
identity of another person to file a false tax return or fraudulently obtain
employment.
In February 2009, the Federal Trade Commission reported that for the ninth year in a row identity theft was the number one consumer complaint nationwide. Identity theft occurs when someone uses Personally Identifiable Information, such as an individual’s name, Social Security Number, credit card numbers, or other account information, to commit fraud and other crimes. Identity theft affects tax administration when an individual intentionally uses the identity of another person to file a false tax return or fraudulently obtain employment.
The IRS issues ITINs to help individuals comply with Federal tax laws and provide a means to efficiently process and account for tax returns. Only an individual who has a valid filing requirement or is filing a tax return to claim a refund of over‑withheld tax is eligible to receive an ITIN. An ITIN is issued regardless of an individual’s immigration status.
The issuance of an ITIN does not:
In general, the Social Security Administration limits its
assignment of Social Security Numbers to individuals who are
The ITIN does not confer the right to employment, and the
ITIN cannot be used to gain employment.
The ITIN does not confer the right to
employment of an otherwise ineligible individual, and the ITIN cannot legally
be used to gain employment. However,
many tax returns are filed by taxpayers who use another individual’s name and/or
Social Security Number to work, but file tax returns using their own names and assigned
ITINs.
Consequences of using another person’s name
and Social Security Number to work and report income include the following:
·
Wages earned by an individual who works using
another person’s Social Security Number will be reported by the employer to the
Social Security Administration as being earned by the individual assigned that
Social Security Number.
·
Wages
earned by an individual using another person’s Social Security Number will be
reported to the IRS by the Social Security Administration as income to the individual
assigned the Social Security Number.
·
The
individual assigned the Social Security Number will not report the wages on his
or her tax return, if a tax return was required and/or filed.
Other complications occur when individuals use
their own names but other persons’ Social Security Numbers to work or use an
ITIN to work and report wages and other income (such as interest income).
This review was
performed at the Wage and Investment Division Program office in
Internal Guidelines Should Be Updated to Handle Collection Issues Associated With Individual Taxpayer Identification Numbers
There are no internal guidelines that address what an IRS employee should do when an individual who has used another person’s Social Security Number to work contacts the IRS to have a wage levy released. How the IRS responds depends on whether the individual using another person’s Social Security Number to work has an ITIN and/or has filed a tax return.
·
Tax complications can occur for the
legitimate holder of the Social Security Number used by other(s) to work.
A levy is a legal seizure of property to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.
If taxes owed are not
paid, the IRS may seize and sell any type of real or personal property that the
taxpayer owns or has an interest in. For
instance, it could:
·
Seize and sell property that the taxpayer holds (such as a car,
boat, or house).
· Levy property that is the taxpayer’s but is held by someone else (such as wages, retirement accounts, dividends, and bank accounts).
The IRS usually levies
only after three requirements are met:
·
The taxpayer was assessed the tax and sent a notice for demand for payment.
·
The taxpayer neglected or refused to pay the tax.
·
The taxpayer was sent a final notice at least 30 days before the
levy
·
These
complications can occur when the IRS matches income to tax returns and
identifies income that is not reported on the tax return of the legitimate
holder of the Social Security Number.
The income could result in additional taxes owed. The legitimate holder of the Social Security
Number must prove that this income is not his or hers.
·
Tax complications can occur for the
individual who used another’s Social Security Number to work when collection
actions are taken on the account of the legitimate holder of the Social
Security Number. When a taxpayer owes additional taxes, the
IRS may levy property. The individual
who has stolen the identity of a taxpayer to work can have his or her wages
levied. He or she must then provide
sufficient support to the IRS to release the levy.
Internal guidelines address what employees should do when taxpayers claim that income reported with their Social Security Numbers is not theirs
The following scenario provides an example of a tax complication created when an individual uses another person’s identity to work.
A taxpayer received a
Notice of Underreported Income (CP 2000) from the IRS stating that he did not
report all his income on his Tax Year 2008 return. He did not report $3,500 in wages from XYZ
Company. The taxpayer claims he never
worked for XYZ Company but worked the entire year for ABC Company. He believes he may be a victim of identity
theft.
When the above scenario is encountered, internal guidelines
instruct IRS employees to advise taxpayers who call the toll-free telephone lines
or visit a
1. Contact the Federal Trade Commission at (877-438-4338) to complete an Identity Theft Affidavit.
2. Make a report to their local police and the three major credit bureaus.
3. Respond to the IRS notice and include the following documentation: A copy of the taxpayer’s valid U.S. Federal or State government-issued form of identification including, for example, driver’s license, State identification card, Social Security card, or passport and a signed IRS Identity Theft Affidavit (Form 14039).
IRS employees subsequently work the taxpayer’s case and if the proper documents are provided, employees close the case by removing the income from the taxpayer’s account and sending him or her notification that the issue has been resolved. Using the previous example, the IRS employee would remove the income from XYZ Company from the taxpayer’s account and send a letter advising him or her that the income has been removed and the issue has been resolved.
Internal guidelines do not address how to release a wage levy when the IRS has levied the wages of an individual who used another individual’s Social Security Number to work
The following scenario provides a second example of a tax complication created when an individual uses another person’s identity to work.
An individual visits an
IRS walk-in office, called a
There are specific instructions addressing the situation where a
taxpayer who used another person’s Social Security Number to work (called the
“borrower”) comes into a
Once the borrower proves the use of the Social Security Number via pay
stubs or any other substantiating document, the
There are no guidelines for
Taxpayer Assistance Center assistors who have encountered the previous scenario have released the levy when the taxpayer proved to the assistor that the wages were his or hers but that he or she was not the taxpayer with the balance due account (the legitimate holder of the Social Security Number). However, the following actions are not required and were not taken to ensure:
It is also unclear if the wages reported on the account of the legitimate holder of the Social Security Number were a direct cause of or contributed to him or her owing additional taxes.
This situation was reported as occurring at only two Taxpayer Assistance Centers and we did not identify any other employees experiencing issues with levies associated with ITIN taxpayers. However, there are no data to determine the prevalence of the problem.
The IRS stated that it has a working group that addresses unique situations, such as the situation above and it addressed this situation in part. However, it is waiting for a response from IRS Counsel before it proceeds.
Also, although the scenario deals with the issue of a wage levy, other collection issues related to ITIN taxpayers could be presented to IRS employees. The IRS has not updated its internal guidelines to include collection issues related to identity theft and ITINs. Guidelines need to be developed to cover issues related to identity theft and the use of ITINs to work. Without collection procedures in place, taxpayers cannot be assured that the correct actions are being taken to address their issues.
There are no procedures for the IRS to contact taxpayers who unknowingly may be victims of identity theft
The IRS has no procedures for employees
to initiate a process for notifying taxpayers who may be unaware that their Social
Security Numbers have been stolen. When
banks or credit card companies suspect that a customer’s identity has been
stolen or his or her account has been compromised, the customer is notified
immediately so that the bank can assist the customer with the issue. However, the IRS does not notify the taxpayer
when there is evidence that the taxpayer’s identity has been stolen. Currently, the procedures require that the
taxpayer first contact the IRS before the account can be flagged with an
identity theft indicator. Without a process in place to notify
taxpayers when there is evidence of identity theft, the taxpayer may be
burdened and the taxpayer may expend extensive resources to resolve identity
theft issues.
During the IRS Commissioner’s
testimony on April 16, 2008, the Chairman of the Senate Finance Committee
expressed a concern that the IRS was not notifying the rightful owner of a
Social Security Number when it was being used by someone else. In response to the concern, the IRS
Commissioner stated that “…we’re [IRS] working on doing that now in
our outgoing communication to taxpayers so they’ll know if someone else is
using their Social Security Number.”
Recommendations
The Commissioners, Small Business/Self-Employed and Wage and Investment
Divisions, should:
Recommendation 1: Update internal procedures and guidelines to ensure all collection issues are considered and all required actions are taken to resolve the issues. For example, guidance should include: 1) what documents are required to prove an individual’s identity, 2) what documents are required to prove who earned the wages and who is responsible for any taxes owed, and 3) how to ensure all filing requirements for reporting the wages have been met. In addition, if identity theft has been identified, the guidelines should include all actions that need to be taken to resolve any account issues for the victim of the identity theft and to place an indicator on his or her tax account.
Management’s
Response: The IRS agreed with this
recommendation and has already begun taking steps to update its procedures. Several updates are currently in the approval
process.
All IRS functions have
procedures in place to mark accounts when taxpayers report they are victims of
identity theft and provide standard documentation. The IRS also has a process in place to
resolve account issues for taxpayers who have been victims of identity
theft. The Identity Protection
Specialized Unit receives a monthly list of accounts with an identity theft
indicator. A review is conducted on
every account to ensure all identity theft issues are addressed and resolved.
Office
of Audit Comment:
Recommendation
2: Establish a process to notify a taxpayer when there is evidence
that the taxpayer’s identity (name and Social Security Number) has been
compromised.
Management’s
Response: The IRS disagreed with the assertion that it does not have
procedures to notify taxpayers when there is clear evidence of identity
theft. The Social Security
Administration has a program in place called the Employee No-Match Letter that
requests correct information from individuals.
IRS involvement would possibly be a duplication of the Social Security
Administration’s efforts.
The IRS currently marks the
accounts of taxpayers when they identify, either through systemic processes or
through manual account review, that the taxpayer is a victim of identity
theft. It places an identity theft
marker on the accounts to streamline assistance for taxpayers and to help
mitigate future account problems. When it
marks these accounts, it also generates notices to the victims informing them
their information appears to have
been compromised and of the steps they can take to protect their identity. The IRS will explore the
feasibility of expanding the use of identity theft indicators and notification
processes where it has the capability and legal authority to do so and where
doing so would be beneficial to taxpayers.
Office Audit Comment: As stated in the report, the IRS has no procedures for employees to initiate a process for notifying taxpayers who may be unaware that their Social Security Numbers have been stolen, as evidenced by the situation we presented in the report. Functional employees are not instructed to put an identity theft indicator on the account of the victim or forward the case to the Identity Theft function when it is other than the victim who has reported the identity theft.
Income Matching Associated With Individual Taxpayer Identification Numbers Present Many Challenges to Tax Administration
Tax
administration becomes more complex when individuals:
The IRS associates taxpayers with tax
records using a Taxpayer Identification Number, be it an ITIN, Social Security
Number, or Employer Identification Number.[8] Using the
Taxpayer Identification Number, the IRS matches income and wages from reporting
documents to taxpayers’ tax returns. Problems
occur when there are mismatches, such as the name does not match the assigned
Social Security Number, the taxpayer used a Social Security Number to work but
filed using an ITIN, or the taxpayer used an ITIN to work and report wages and
income.
From a
statistical sample of 96 records from a population of 551,108 Tax
Year 2007 electronically filed tax returns:
·
4 records
(4 percent) showed that the taxpayer filed a tax return using an ITIN but used
another person’s name and Social
Security Number to work (possible instances of identity theft). The name on the Wage and Tax Statement (Form W-2) matched the name of the holder
of the Social Security Number but did not match the name on the ITIN tax
return. There is a potential that
22,962[9]
taxpayers for Tax Year 2007 had their names and Social Security Numbers used by
ITIN tax filers to work; 114,812 taxpayers projected over 5 years.
The IRS will be
unable to match the income earned to the associated taxpayer, but will match it
to the taxpayer who is legally assigned the Social Security Number as part of
the Automated Underreporter Program.[10] Further, there
were no identity theft indicators on any of the accounts of the taxpayers whose
Social Security Numbers had been used by ITIN taxpayers to work.
·
73
records (76 percent) showed the taxpayer used his or her name but another
person’s Social Security Number to work.
Twenty-seven records showed the Social Security Numbers used to work and
report wages belong to individuals under the age of 18, ****1**** In addition, 6 Social
Security Numbers belonged to taxpayers who are now deceased and 5 Social
Security Numbers belong to individuals who are over age 100.
In these instances, the IRS and the Social Security Administration do not associate the income and benefits with the lawful taxpayer. ****2(e)****
The number of Forms W-2 with Social Security Number/name mismatches is substantial. The Social Security Administration maintains an Earnings Suspense File for wage information reported on the Forms W-2 where the Social Security Number and name do not match. This file contained approximately 296 million mismatched Forms W-2 related to $835.7 billion in wages at the end of Calendar Year 2007. In some cases, the Social Security Administration has tried to correct these mismatches by notifying employers of the errors on the Forms W-2 through a “no match” letter. Employers that receive these letters are requested to take steps to correct the mismatch issue for each Social Security Number that failed verification with Social Security Administration records. If the employer does not make an effort to correct the Forms W-2, the IRS can assess a penalty.
Both the TIGTA and the Government Accountability Office have issued reports that address the tax problems related to Social Security Number/name mismatches.[11]
·
19 (20 percent) records that included Forms W-2 could not
be matched to any employers’ records and a determination could not be made
whether the ITIN taxpayer was using another person’s Social Security
Number. We attempted to verify the
information by matching the Employer Identification Number, wages, and/or
withholding on the employee’s Form W‑2 to the employer’s
returns. However, for these 19 records,
the combination of Employer Identification Number, wages, and withholding could
not be matched to employer records maintained in the IRS computer systems.
Approximately
1.2 million Tax Year 2007 tax returns reported wages earned by ITIN taxpayers
using another’s Social Security Number.
The IRS stated there were almost 3 million ITIN tax returns filed for Tax Year 2007. TIGTA analysis shows that about 1.2 million Tax Year 2007 ITIN tax returns reported wages earned by ITIN taxpayers using another person’s Social Security Number. ****2(f)****
In addition, the IRS cannot currently identify identity theft cases created by ITIN taxpayers who used another person’s name and Social Security Number to work. This would allow the IRS to notify the legitimate owner of the Social Security Number that he or she may be the victim of identity theft and take steps to address employment-related identity theft issues.
In
Fiscal Year 2008, we reported that no
action is taken to stop someone from continuing to commit employment-related
identity theft using another person’s Social Security Number and name.[13] The
IRS does not actively try to identify or stop the individuals from committing
identity theft. Moreover, the IRS does
not notify the employer of the problem of their employee using someone else’s
identity. Because the IRS and the
Social Security Administration will assume the information on the Form W-2 is accurate, the earnings
resulting from the identity theft will be attributed to the lawful taxpayers
for determining both Social Security benefits and tax liabilities. The
IRS generally does not pursue the taxes that may be due on income earned using
a stolen identity.
IRS management stated that the IRS is unable
to do more to stop continued use of someone’s identity in employment-related
identity theft cases because notifying employers that their employee is using
another person’s identity is not permissible because it would be an unlawful
disclosure of tax information. In addition,
the IRS does not have
sufficient enforcement resources to address most of these cases and it would
not be worthwhile to pursue employment-related identity theft cases for unreported
tax liabilities because, according to IRS officials, the taxes owed on most of
these cases are not significant. However, without an effective process of
identifying these taxpayers, the IRS and the taxpayer will continue to expend additional
resources in resolving these identity theft issues.
The IRS is developing a 5-year strategy for the Office of Privacy, Information Protection and Data Security function, and will continue to improve strategies focused on tax fraud identity theft. The Criminal Investigation Division is increasing the recommendations for prosecutions of identity theft cases under traditional statutes within the IRS’ jurisdiction as directed by the Department of Justice Tax Division.
Recommendations
The Deputy Commissioner for Operations Support, should:
Recommendation 3: Develop a cross-referencing process to match ITIN tax returns to the related reporting returns.
Management’s
Response: The IRS has already begun developing a process to match
ITIN tax returns to their related reporting returns. Once this process is established, it will
determine how the data may be used to refine procedures related to collection
activity and victim assistance.
Recommendation 4: Develop a process to capture data to determine potential
identity theft victims.
Management’s
Response: The IRS has procedures to identify theft victims through
the Electronic Fraud Detection System.[14] Where appropriate,
taxpayer’s accounts are marked with an identity theft indicator. In addition, its duplicate filing process
procedures compare certain data elements of duplicate tax returns to determine
potential identity theft victims.
The IRS agreed to explore the
feasibility of a process to more broadly capture data to determine potential
identity theft victims.
Appendix I
Detailed Objective, Scope, and Methodology
Our overall objective was to determine
whether the IRS has procedures to effectively handle collection issues related
to ITINs. To accomplish our objective,
we:
I.
Determined
if procedures and guidelines exist for
A.
Reviewed internal
B.
Interviewed
C.
Discussed with appropriate IRS management the
procedures, policies, guidelines, and regulations for ITIN collection issues.
II.
Determined
if the Collection function has procedures for revenue officers to follow when
contacting ITIN taxpayers.
A.
Reviewed Collection function procedures and
guidelines for ITIN collection issues for revenue officers.
B.
Interviewed revenue officers who have
encountered ITIN taxpayers for their experiences with collection issues.
C.
Discussed with appropriate IRS management the
procedures, policies, guidelines, and regulations for ITIN collection issues.
III.
Determined
the number of taxpayers who file a tax return using an ITIN while using another
individual’s Social Security Number to work.
A.
From the Returns Transaction File,[16]
identified the Tax Year 2007 ITIN tax
returns processed during Calendar Year 2008 that did not have a corresponding
ITIN Wage and Tax Statement (Form W-2)
issued by an employer. We
assessed the reliability of the Returns Transaction File by performing
run-to-run balancing and verifying a sample of all fields against the IRS
Integrated Data Retrieval System.[17]
B.
Selected a statistically valid sample of 96
ITIN records from a population of 551,108 Tax Year 2007 tax returns that
were identified on the Return Transaction File.
We used a 95 percent confidence level, a 50 percent error rate, and a 10
percent precision level. For each of the
96 records, we used the Integrated Data Retrieval System Command Code
TRDBV to determine the name(s) used on the tax returns, the filing statuses,
and the number of Forms W-2 attached.
From each Form W-2, we obtained the payee Taxpayer Identification
Number, ITIN or Social Security Number, the payer Employer Identification Number,[18] the wage amounts, and the Federal tax
withheld amounts.
IV.
Contacted
the IRS Office of Privacy, Information Protection and Data Security, Operations
Support organization to identify any actions it may be taking to address ITIN
collection issues.
Internal controls methodology
Internal controls relate to management’s
plans, methods, and procedures used to meet their mission, goals, and
objectives. Internal controls include
the processes and procedures for planning, organizing, directing, and
controlling program operations. They
include the systems for measuring, reporting, and monitoring program
performance. We determined the following
internal controls were relevant to our audit objective: the Office of Privacy, Collection and Field
Assistance functions’ policies, procedures, and practices for processing levies
related to ITINs and identifying identity theft. We evaluated controls by interviewing
management and reviewing policies and procedures.
Appendix II
Major Contributors to This Report
Michael
E. McKenney, Assistant Inspector General for Audit (Returns Processing and
Account Services)
Augusta
R. Cook, Director
Tracy
K. Harper, Lead Auditor
Jerome
Antoine, Auditor
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy
Commissioner for Services and Enforcement
SE
Chief
Technology Officer OS:CTO
Deputy
Commissioner, Small Business/Self-Employed Division SE:S
Deputy
Commissioner, Wage and Investment Division
SE:W
Director,
Collection, Small Business/Self-Employed Division SE:S:C
Director,
Compliance, Wage and Investment Division
SE:W:CP
Director,
Customer Account Services, Wage and Investment Division SE:W:CAS
Director,
Strategy and Finance, Wage and Investment Division SE:W:S
Director, Office of Privacy, Information Protection and Data Security OS:P
Senior Operations Advisor, Wage and Investment
Division SE:W:S
Chief, Program Evaluation and Improvement,
Wage and Investment Division SE:W:S:PRA:
Chief Counsel CC
National Taxpayer Advocate TA
Director,
Office of Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
RAS:O
Office of Internal Controls OS:CFO:CPIC:IC
Audit Liaison: Chief,
Program Evaluation and Improvement, Wage and Investment Division SE:W:S:PRA:
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
· Taxpayer Privacy and Security – Potential, 22,962 taxpayers for Tax Year 2007 that had their names and Social Security Numbers used by ITIN tax filers for work; 114,812 taxpayers projected over 5 years (see page 9).
Methodology Used to Measure the Reported Benefit:
A statistically valid sample of 96 ITIN records was selected from a population of 551,108 Tax Year 2007 tax returns that were identified on the Return Transaction File.[19] For each of the 96 records, the Integrated Data Retrieval System[20] Command Code[21] TRDBV was used to determine the name(s) used on the tax returns, the filing statuses, and the number of Wage and Tax Statements (Form W-2) attached. From each Form W-2, the payee Taxpayer Identification Number, either the ITIN or Social Security Number, the payer Employer Identification Number,[22] the wage amounts, and the Federal tax withheld amounts were obtained and matched to employer wage reporting documents. We used a 95 percent confidence level, an expected error rate of 50 percent, and a precision level of 10 percent.
Based on the sample
results, it was determined that 4 (4 percent) of 96 cases from the population
of 551,108 Tax Year 2007 tax returns had their names and Social
Security Numbers used for work by ITIN tax filers. This projected out is 22,962
taxpayers for Tax Year 2007 and 114,812 taxpayers projected over 5
years.[23] The
number of affected taxpayers is between 6,338 and 51,253 (the margin of error
is ± 4.08 percent).
Appendix V
Management’s Response to the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
COMMISSIONER
WAGE AND
INVESTMENT DIVISION
MAR 17 2010
MEMORANDUM FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Richard Byrd. Jr. /s/Richard Byrd
Commissioner, Wage and Investment Division
SUBJECT: Draft Audit Report - Procedures Need to Be Developed for Collection Issues Associated With Individual Taxpayer Identification Numbers (Audit #200940042)
I appreciate your efforts to review and recommend improvements related to collection issues involving Individual Taxpayer Identification Numbers (ITIN).
As your report notes, there are a variety of complex scenarios encountered when working collection issues involving ITIN taxpayers, particularly where the information on the tax return does not match the information on the W-2. These issues often involve multiple operating divisions of the IRS, so to ensure that our efforts are coordinated, and that we have the right people working these issues, we established an internal Technical Working Group in 2008.
In general, we agree with the recommendations contained in your report. However, we are concerned that the report makes overly broad statements that imply that the IRS has no procedures to contact individuals where we have clear indications of identity theft. This is not the case. The IRS has significantly ramped up our identity theft detection, monitoring, and notification capabilities over the last several years. In 2008, we created a central identity theft unit to ensure that the IRS is doing everything it can to help make sure that when someone has their identity stolen, they can quickly resolve any issues that arise with the IRS.
Because the IRS processes approximately 140 million individual tax returns and over one billion information returns, we are constantly making decisions about how to handle data anomalies, such as the ones that you describe in your report. With respect to ITIN issues, the IRS must assess the evidence of potential economic harm to the taxpayer, against the limitations of the extent of information that the law allows us to provide to the taxpayer. We try to reach the right balance, but constantly reassess that balance, and will certainly incorporate the findings of your audit as we determine whether additional improvements are needed.
Attached are our specific comments to your recommendations. If you have any questions, please contact me, or a member of your staff may contact Denice Vaughan, Director, Filing and Payment Compliance, Wage and Investment Division at (404) 338-9116.
Attachment
Attachment
The Commissioners, Small Business/Self-Employed and Wage and Investment Divisions, should:
Recommendation 1
Update internal procedures and guidelines to ensure all collection issues are considered and all required actions are taken to resolve the issues. For example, guidance should include: 1) what documents are required to prove an individual's identity, 2) what documents are required to prove who earned the wages and who is responsible for any taxes owed, and 3) how to ensure all filing requirements for reporting the wages have been met. In addition, if identity theft has been identified, the guidelines should include all actions that need to be taken to resolve any account issues for the victim of the identity theft and to place an indicator on his or her tax account.
Corrective Action
We agree with this recommendation and already have begun taking steps to update procedures. Several Internal Revenue Manual (IRM) updates are currently in the approval process. The affected IRM sections are: IRM 5.1.12, Cases Requiring Special Handling, 5.1.15 Abatements, Reconsiderations and Adjustments, and IRM 5.12.2, Lien Filing Requirements.
All IRS functions have procedures in place to mark accounts when taxpayers report they are victims of identity theft and provide standard documentation. The IRS also has a process in place to resolve account issues for taxpayers who have been victims of identity theft. The Identity Protection Specialized Unit receives a monthly listing of accounts with an identity theft indicator. A review is conducted on every account to ensure all identity theft issues are addressed and resolved.
Implementation
Date
January 15, 2011
Responsible
Officials
Director, Filing and Payment Compliance, Wage and Investment Division
Director, Collection Policy, Small Business/Self Employed Division
Corrective Action
Monitoring Plan
We will monitor this corrective action as part of our internal management control process.
Recommendation 2
Establish a process to notify a taxpayer when there is evidence that the taxpayer's identity (name and SSN) has been compromised.
Corrective Action
As noted above, we disagree with the assertion that the IRS does not have procedures to notify taxpayers when there is clear evidence of identity theft. The Social Security Administration (SSA) has a program in place called the Employee No-Match Letter that requests correct information from individuals. Our involvement would possibly be a duplication of the SSA efforts.
The IRS currently marks the accounts of taxpayers when we identify, either through systemic processes or through manual account review, that the taxpayer is a victim of identity theft. We place an identity theft marker on these accounts to streamline assistance for taxpayers and to help mitigate future account problems. When we mark these accounts, we also generate a notice to these victims informing them that their information appears to have been compromised, and of steps they can take to protect their identities. This notice includes a toll-free number to our Identity Protection Specialized Unit which will assist them with questions about their account. We started this process in October 2008, and have seen its use increase from 16,838 taxpayer accounts marked in 2008, to 20,847 marked in 2009. We will explore the feasibility of expanding the use of our account indicators and notification processes where we have the capability and legal authority to do so; and where doing so would be beneficial to taxpayers.
Implementation
Date
Completed October 2008
Responsible
Official
Director, Privacy, Information Protection & Data Security
Corrective Action
Monitoring Plan
N/A
The Deputy Commissioner for Operations Support, should:
Recommendation 3
Develop a cross-referencing process to match ITIN tax returns to the related reporting returns.
Corrective Action
We have already begun developing a process to match Individual Taxpayer Identification Number (ITIN) tax returns to their related reporting returns. Once this process is established, we will determine how the data may be used to refine procedures related to collection activity and victim assistance.
Implementation
Date
August 31, 2011
Responsible
Official
Director, Privacy, Information Protection & Data Security
Corrective Action
Monitoring Plan
We will monitor this corrective action as part of our internal management control process.
Recommendation 4
Develop a process to capture data to determine potential identity theft victims.
Corrective Action
The IRS has procedures to identify potential identity theft victims through the Electronic Fraud Detection System. Where appropriate, taxpayers' accounts are marked with an identity theft indicator. Additionally, our duplicate filing process procedures compare certain data elements of duplicate tax returns to determine potential identity theft victims.
We agree to explore the feasibility of a process to more broadly capture data to determine potential identity theft victims.
Implementation
Date
August 31, 2011
Responsible
Official
Director, Privacy, Information Protection & Data Security
Corrective Action
Monitoring Plan
We will monitor this corrective action as part of our internal management control process.
[1]
The ITIN was created to provide individuals who
are not eligible to obtain a Social Security Number with an identification
number for tax purposes. An ITIN does
not change the recipient’s immigration status or confer the right of employment
in the
[2] A levy is a legal seizure of property to satisfy a tax debt.
[3] A local IRS office with employees who answer questions, provide assistance, and resolve account-related issues for taxpayers face to face.
[4] An Employer Identification Number is a Federal Tax Identification Number used to identify a business entity, including estates and trusts.
[5] A compliance system that provides tools needed to perform detection of potentially criminal fraudulent tax returns.
[6]
The ITIN was created to provide individuals who
are not eligible to obtain a Social Security Number with an identification
number for tax purposes. An ITIN is a
nine-digit number that always begins with the number 9 and has a 7 or 8 in the
fourth digit, for example 9XX-7X-XXXX.
[7] A levy is a legal seizure of property to satisfy a tax debt.
[8] An Employer Identification Number is a Federal Tax Identification Number used to identify a business entity, including estates and trusts.
[9] 4.1666 percent multiplied by 551,108 equals 22,962, and 22,962 multiplied by 5 years (projection) equals 114,812. Due to rounding, numbers may not balance.
[10] The Underreporter Program works underreporter cases resulting when computer analysis detects a discrepancy between the income reported on tax returns and the income reported by third parties, such as employers and financial institutions.
[11]
Mismatched
Names and Identification Numbers on Information Documents Could Undermine Strategies
for Reducing the Tax Gap (Reference
Number 2007-30-159, dated August 31, 2007) and Tax Administration: IRS Needs to
Consider Options for Revising Regulations to Increase the Accuracy of Social
Security Numbers on Wage Statements (GAO-04-712, dated August 2004).
[12] ****2(f)****
[13] Outreach Has Improved, but More Action Is Needed to Effectively Address Employment-Related and Tax Fraud Identity Theft (Reference Number 2008-40-086, dated March 25, 2008).
[14] A compliance system that provides tools needed to perform detection of potentially criminal fraudulent tax returns.
[15] A local IRS office with employees who answer questions, provide assistance, and resolve account-related issues for taxpayers face to face.
[16] The Returns Transaction File contains all edited, transcribed, and error-corrected data from the U.S. Individual Income Tax Returns (Form 1040 series) and related forms for the current processing year and 2 prior years.
[17] IRS computer system capable of retrieving or updating stored information; it works in conjunction with a taxpayer’s account records.
[18] An Employer Identification Number is a Federal Tax Identification Number used to identify a business entity, including estates and trusts.
[19] The Returns Transaction File contains all edited, transcribed, and error-corrected data from the U.S. Individual Income Tax Returns (Form 1040 series) and related forms for the current processing year and 2 prior years.
[20] The Integrated Data Retrieval System is the IRS computer system capable of retrieving or updating stored information; it works in conjunction with a taxpayer’s account records.
[21] Command codes are online interactive real-time programs in the IRS computer systems.
[22] An Employer Identification Number is a Federal Tax Identification Number used to identify a business entity, including estates and trusts.
[23] 4.1666 percent multiplied by 551,108 equals 22,962, and 22,962 multiplied by 5 years (projection) equals 114,812. Due to rounding, numbers may not balance.