TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

Processes Are Not Sufficient to Assist Victims of Employment-Related Identity Theft

Final Report issued on August 10, 2016

Highlights of Reference Number:  2016-40-065 to the Internal Revenue Service Commissioner for the Wage and Investment Division and the Commissioner for the Small Business/Self-Employed Division.

IMPACT ON TAXPAYERS

Employment-related identity theft occurs when an identity thief uses the identity of an innocent taxpayer to gain employment.  Taxpayers may first realize they are a victim of employment-related identity theft when they receive an IRS notice of a discrepancy in the income they reported on their tax return.  The identification of the discrepancy is from the IRS’s Automated Underreporter (AUR) Program match of taxpayer income reported on third-party information returns (e.g., Forms W-2, Wage and Income Statement) to amounts reported by taxpayers on their individual income tax returns.

WHY TIGTA DID THE AUDIT

This audit was conducted to evaluate the IRS’s AUR processes to identify and assist victims of identity theft.  In July 2011, TIGTA reported that the IRS is in a unique position to identify cases of employment-related identity theft.  TIGTA recommended that the IRS implement procedures to timely alert taxpayers when the IRS becomes aware that their identity was stolen.

WHAT TIGTA FOUND

Taxpayers identified as victims of employment-related identity theft are not notified.  During the period February 2011 to December 2015, the IRS identified almost 1.1 million taxpayers who were victims of employment-related identity theft.  In April 2014, the IRS started a pilot initiative to begin notifying taxpayers that they may be a victim of employment-related identity theft.  However, our review of the pilot notification initiative found that the IRS did not sufficiently design the pilot to include a representative sample of employment identity theft victims. 

The IRS has not established an effective process to ensure that the required notice is sent to the Social Security Administration (SSA) to alert it of earnings not associated with a victim of employment-related identity theft.  Our review of a statistically valid sample of 71 cases from the population of 1,878 Tax Year 2013 AUR cases closed as identity theft (i.e., case involved a discrepancy related to wages reported on the tax return) identified that the SSA has no record of receiving an IRS notice for 15 (21 percent) of the 71 cases.

Finally, TIGTA’s review of another statistically valid sample of 71 Tax Year 2013 closed AUR cases from the population of 2,011 identity theft cases identified eight (11.3 percent) that were inaccurately processed.  Based on these results, the AUR Program may have inaccurately processed an estimated 227 cases.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS develop procedures to notify all individuals identified as victims of employment-related identity theft; develop a tracking process to ensure that notices are completed and sent to the SSA and send notices to the SSA for the 15 discrepancy cases TIGTA identified; and ***************************************1*********************************************** *******************************1***************************************************.

The IRS agreed with three recommendations and ******1********** with the fourth.  The IRS plans to notify newly identified victims of employment-related identity theft starting January 2017.  The IRS will also develop a process to track notices sent to the SSA and send notices for the 15 taxpayers that TIGTA identified.  Finally, **************************************1************************************** ********************************************* ***********************************************************1*********************************************************************************************************************************.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

http://www.treasury.gov/tigta/auditreports/2016reports/201640065fr.pdf.

 

Redaction Legend:

1 = Tax Return/Return Information

 

Phone Number   /  202-622-6500

E-mail Address  /  TIGTACommunications@tigta.treas.gov

Website             /  https://www.treasury.gov/tigta