Office of Audit
PARTNERSHIP WITH STATE AND INDUSTRY
LEADERS IS A KEY FOCUS IN
FURTHER REDUCING TAX-RELATED IDENTITY THEFT
Final Report issued on December 27, 2018
Highlights of Reference Number: 2019-40-012 to the Commissioner of Internal Revenue.
IMPACT ON TAXPAYERS
Identity theft tax refund fraud occurs when an individual uses another person’s name and Taxpayer Identification Number to file a fraudulent tax return. In its most recent Identity Theft Taxonomy report for Processing Year 2016, the IRS estimates that it prevented the issuance of between $10.56 billion and $10.61 billion in fraudulent tax refunds. However, the IRS also reported that identity thieves were successful in receiving an estimated $1.68 billion to $2.31 billion in fraudulent tax refunds.
WHY TIGTA DID THE AUDIT
This audit was initiated to assess the effectiveness of the IRS’s ongoing efforts to detect and prevent tax-related identity theft, measure undetected identity theft, and coordinate identity theft information with other Government agencies and tax industry partners.
WHAT TIGTA FOUND
The IRS continues to expand its efforts to detect and prevent identity theft. For Processing Year 2018, the IRS is using 200 identity theft filters to identify potentially fraudulent tax returns at the time returns are filed and prior to issuance of the refund. As of December 31, 2017, the IRS had identified 652,119 fraudulent returns and prevented more than $7.2 billion in fraudulent tax refunds as a result of these filters.
The IRS continues to work with the Security Summit to explore programs and processes to improve the extent of sharing identity theft information in an effort to further improve the detection and prevention of tax‑related identity theft through the Identity Theft Tax Refund Fraud Information Sharing and Analysis Center (ISAC). The IRS and its partners launched the ISAC as a pilot in January 2017.
According to the April 2018 Identity Theft Tax Refund Fraud ISAC Annual Report, participation in the ISAC has increased from 18 participating organizations in Calendar Year 2017 to 60 participating organizations and more than 400 registered users in Calendar Year 2018. The report also states that alert and data contributions by participating organizations have increased by more than six times since January 2017.
In addition, the IRS developed additional filters in response to TIGTA recommendations to improve the detection of fraudulent tax returns that use Schedule C, Profit or Loss From Business (Sole Proprietorship), income and foreign addresses. However, because of programming errors and the use of a dollar tolerance, 28,092 potentially fraudulent tax returns with refunds totaling more than $4.4 million were not identified.
Finally, the IRS began the Form W-2, [Wage and Tax Statement] Verification Code initiative in Processing Year 2016 as a pilot program. IRS management informed us that Processing Year 2018 is the last year it will operate as a pilot program. However, the passage of legislation as well as significant payroll provider data breaches warrant ensuring that there is continued business value before the IRS expands the Verification Code initiative.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS revise identity theft detection filters to eliminate specific dollar tolerances and ensure that the reduction in the risk of tax-related identity theft warrants full implementation of the Form W-2 Verification Code Program. The IRS disagreed with one of the two recommendations. The IRS does not believe eliminating the dollar tolerances from filters would be a wise use of its resources. TIGTA believes that, at a minimum, the IRS should consider reducing the dollar tolerance to reduce the known risk in this area.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number / 202-622-6500
E-mail Address /