IRS struggling to tackle massive surge in identity theft

Friday - 11/30/2012, 6:16pm EST

Jared Serbu, Federal News Radio reporter

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The number of Americans whose identities have been stolen for the purpose of filing fraudulent tax returns has risen exponentially in just the last several years. But the IRS' tight budgets and inefficient business resources have stymied its efforts to fight the problem.

In 2008, there were 51,700 confirmed cases of tax-refund identity theft in the United States. By 2011, the number was 1.1 million, and those are just the cases the IRS knows about. An audit by the Treasury Inspector General for Tax Administration (TIGTA) earlier this year estimated another 1.5 million potential cases in which thieves stole identities for the purpose of getting fraudulent refunds. And IRS could give out $21 billion dollars in fraudulent refunds in just the next five years if the agency doesn't find a way to crack down, according to TIGTA.

"People are nimble, and they will use ingenuity when it comes to taking advantage of a federal program, a state program or a nongovernmental program if they think they can get away with it — and they are," Russell George, the tax IG told the House Oversight and Government Reform Committee Thursday. "And keep in mind this is not only a domestic problem, this is an international problem."

The IRS estimated it would need another $32 million to investigate those 1.5 million potentially fraudulent returns from 2011 — money it doesn't have right now, and doesn't appear to be forthcoming.

"We've cut their budget by $350 million," said Rep. Gerry Connolly (D-Va.). "You can be smart all you want, that's a real cut. It means they're handicapped in terms of the resources they need to be dealing with this subject in an efficacious way."

Bigger budget isn't only answer

The IRS said it recognizes the magnitude of the problem. So, despite the budget squeeze, it reallocated money and staff internally, doubling the size of its workforce that handles identity theft, and officials will assign 3,000 people to the issue for the upcoming tax filing season.

But George said that's far from a perfect solution.

"It's a zero-sum game. Unless they're given additional resources, they have to take people from one function and apply them to another," he said. Even with the increased attention to identity theft, TIGTA and the Government Accountability Office say IRS is falling behind, and a bigger budget isn't the only answer.

"One thing to note is that despite the increase in resources IRS has devoted to the problem, the problem continues to grow and get worse. They're not keeping up," said James White, the director for strategic issues at GAO. "And resolving cases after the fraud has occurred is very labor intensive. It's a huge hit to the budget. The trick here is figuring out a way to prevent the fraud in the first place. That means doing more research up front, experimenting with better filters to prevent the fraud. That way you avoid this time-consuming, costly process that's so terrible for the victims."

IRS said it's focused on prevention too. The bureau will expand this year a pilot program to 600,000 users that issues secret PIN codes to taxpayers who've been identity theft victims in the past to prevent them from being the subjects of fraud again. Also, the agency said it's making more use of third-party data help to automatically flag returns that appear to be fraudulent.

"We have an initiative called Real Time, and that gets to the heart of the matter," said Beth Tucker, the deputy IRS commissioner for operations support. "It will make basic information documents available to us so we can match them up quickly with a return when it comes in the door. That does stem an enormous amount of this fraud. So that is something we'll be doing some additional testing on this upcoming filing season, using data analytics and the computing capabilities we have."

Better use of computer matching

GAO and TIGTA have plenty of other recommendations for IRS in the area of identity theft though. For instance, banking industry regulations require that direct deposits into checking accounts match up with the name of the account holder. TIGTA said IRS doesn't follow those regulations, so in one case, one fraudster was able to have 590 separate refunds totaling nearly $1 million deposited into a single account.

And George said the agency also could make better use of data the government already has to verify the identities of tax filers.

"For example, the Department of Health and Human Services has the National Directory of New Hires. If the IRS had expanded access to that directory, which would require statutory changes, it would allow the IRS to better match the withholding and income information provided by a taxpayer to make sure it's accurate," he said. "Most recently, the IRS gained access to the Social Security Administration's database that deals with 1099s. That's assisted it in stemming tax cheats in the Social Security arena."