The IRS has been dealing with an epidemic of tax fraud and identity theft. An audit report prepared by the Treasury Inspector General for Tax Administration (TIGTA) estimated that 940,000 tax returns involved identity theft in 2011. The same audit report estimates that in addition to those, another 1.5 million fraudulent tax returns may have been submitted but not detected by the IRS. Fortunately, in 2012 the IRS has been taking additional steps to help stem the flow of these fraudulent returns. In the TIGTA audit, several recommendations were made to the IRS, and IRS Commissioner of the Wage and Investment Division, Peggy Bogadi, provided details on how the IRS would act in response.


The IRS will seek legislative authority in order to use the National Directory of New Hires to cross reference information submitted in tax returns to determine whether they are fraudulent or legitimate. This will be in addition to verification using third-party income and withholding information that is already in place. Also, the IRS has established the Identity Theft Clearinghouse, a specialized unit within the Criminal Investigation Division, which is completely devoted to the analysis and development of identity theft leads. This effort will include developing new processes such as filtering for changes in taxpayer circumstances from year to year to target identity theft exploits. These actions are being implemented now, but the IRS has several more planned actions that will take place starting October 15, 2013.

The first of those 2013 changes would use Social Security Administration data to help detect false Social Security benefit income and withholding claims at the same time that tax returns are processed. Second, the IRS intends to work with the Financial Management Service (FMS), which is the agency that administers government-wide direct deposits on behalf of the Department of the Treasury. This effort would ensure that the deposits of refunds are only made to debit card bank accounts that are held in the taxpayer’s name. Third, the IRS will cooperate with the FMS to limit the number of tax refunds directly deposited into a single bank account or debit card. This action would prevent multiple refunds being deposited into the same identity thief’s account, a common occurrence. Lastly, the IRS will work with the Department of Treasury Financial Crimes Enforcement Network (FinCEN) to develop stricter regulations that would ensure authentication of each person’s identity that purchases debit cards. After this change is implemented, the IRS would no longer deposit refunds to those debit cards accounts that are with financial institutions that do not enforce this authentication.

While it is clear that the IRS has a significant fraud and identity theft problem, they are clearly taking a very aggressive, proactive, and multifaceted approach to reducing these crimes (and making the IRS more efficient at the same time). The real test of how successful these measures are will come in April 2013 when approximately 240 million new tax returns will be filed.

“IRS Takes New Steps to Prevent Fraud” was written by Sam Imandoust, Esq. He serves as a legal analyst for the Identity Theft Resource Center. We welcome you to post/reprint the above article, as written, giving credit to and linking back to ITRC_Blog