A recently published report from the Government Accountability Office (GAO) entitled TAXES AND IDENTITY THEFT — Status of IRS Initiatives to Help Victimized Taxpayers, found that last year alone the IRS uncovered nearly quarter of a million cases of tax-related identity theft and nearly half a million since 2008.
While some of these cases involve exploiting the social security numbers of the deceased, the majority of the cases use live SSNs of real tax payers who are expecting a refund. The popularity of tax-related identity theft can clearly be seen by the growth in cases uncovered by the IRS. For example, the IRS identified 51,702 incidents in 2008,169,087 incidents in 2009, and 248,357 incidents in 2010.
While the rapid growth in cases uncovered could simply be as a result of greater scrutiny and diligence by the IRS, it's still not good news. And the IRS admits that the first time they identify a case of identity theft it may be too late, because it usually happens when the legitimate taxpayer files their tax return, finds out a return has already been made and a refund paid, and then alerts the IRS.
And while the IRS does take identity theft seriously, it admits in the report that its ability to address identity theft issues is constrained by a number of factors including:
- Privacy laws that limit the IRS's ability to share identity theft information with other agencies;
- The timing of fraud detection — more than a year may have passed since the original fraud occurred;
- The resources necessary to pursue the large volume of potential criminal refund and employment fraud cases; and
- The burden that stricter screening would likely cause taxpayers and employers since more legitimate returns would fail such screening.
The IRS is increasing its vigilance though. For example, it has introduced a screening process that "red flags" returns for additional scrutiny if some things don't make sense — things like an unusually high refund compared to previous years, or a change of home address. As of May 12, 2011, 216,000 returns filed in 2011 failed the screens and were assigned for closer inspection. Of these inspected, 145,537 of the returns, or 74% were fraudulent.
The IRS is also trying to address the growing problem of using the Social Security numbers of the deceased to file tax returns, by locking the Social Security number of the deceased to prevent them from being use to commit tax fraud.
But it's still an uphill battle and will be for years. The report found that in 2009 there were 10 million address changes, 46 million changes in employer, and millions of deaths and births. The GAO observed that "Checking all returns that reflect these changes for possible refund fraud could overwhelm IRS's capacity to issue refunds to legitimate taxpayers in a timely manner."
Last year when I was helping a victim of identity theft to recover a $5,000 refund that was paid to a thief instead, agents with the IRS identity theft hotline freely admitted that they were under-staffed, under-trained, and under-funded, and as a result there was very little they could do to spot cases of identity theft until it's too late.
In many cases I've dealt with, the victim is relying on their refund to pay an important bill, in some cases urgent medical bills. According to the report, the median amount of suspected identity theft-related refunds identified in the 2009 filing season was around $3,400.
When a refund is diverted to an identity thief, the victim can wait a year or longer for the IRS to go through its investigation process and issue a check to the real tax payer. Just in time for the next tax season.