TIGTA and Congress focus on identity theft and tax fraud


On the same day the House Ways and Means Oversight and Social Security Subcommittees held a hearing on tax fraud involving identity theft, the Treasury Inspector General for Tax Administration (TIGTA) released a report saying the IRS does not handle identity theft issues well (TIGTA Rep’t No. 2012-40-050).

Tuesday’s congressional hearing planned to examine how identity theft contributes to tax fraud and whether the IRS and the Social Security Administration are doing enough to protect Social Security numbers and to prevent and detect false tax returns filed by identity thieves.

In announcing the hearing, Oversight Subcommittee Chairman Rep. Charles Boustany Jr., R-La., said it would “explore a major source of the problem—identity thieves who steal Social Security numbers to engage in tax fraud. We need to make sure that we have a complete accounting of the size of the problem, understand why it is getting worse, and explore what can be done to combat tax fraud so we can catch and put more identity thieves in jail.”

TIGTA reports that as of Dec. 31, 2011, the IRS’s Incident Tracking Statistics Report showed that 641,052 taxpayers were affected by identity theft in calendar year 2011.

TIGTA reviewed IRS data from 1.1 million identity theft cases, interviewed IRS employees, and reviewed IRS processes and guidelines. TIGTA discovered that the “IRS is not effectively providing assistance to victims of identity theft, and current processes are not adequate to communicate identity theft procedures to taxpayers, resulting in increased burden for victims of identity theft.”

TIGTA found several problems:

  1. The IRS does not handle identity theft cases in a timely fashion and can take more than a year to resolve them.
  2. Communications between the IRS and victims are limited and confusing, and victims are asked multiple times to substantiate their identity.
  3. When taxpayers call the IRS to advise it that their electronic tax return was rejected because it appears another individual has already filed a tax return using their identity, the IRS instructs them to mail in a paper tax return with the Form 14039, Identity Theft Affidavit, attaching supporting identity documents. However, the IRS has been processing these tax returns using standard processing procedures.
  4. Identity theft guidelines and procedures are dispersed among 38 different Internal Revenue Manual sections. These guidelines are inconsistent and conflicting, and not all functions have guidelines on handling identity theft issues.
  5. The IRS uses little of the data from the identity theft cases to identify any trends that could be used to detect or prevent future refund fraud.

TIGTA made eight recommendations, which the IRS has agreed to. TIGTA recommended that the IRS:

  1. Establish accountability for its Identity Theft Program;
  2. Implement a process to ensure that IRS notices and correspondence are not sent to the address listed on the identity thief’s tax return;
  3. Conduct an analysis of the letters sent to taxpayers regarding identity theft;
  4. Ensure taxpayers are notified when the IRS has received their identifying documents;
  5. Create a specialized unit in the Accounts Management function to exclusively work on identity theft cases;
  6. Ensure all quality review systems used by IRS functions and offices working on identity theft cases are revised to select a representative sample of identity theft cases;
  7. Revise procedures for its Correspondence Imaging System screening process; and
  8. Ensure programming is adjusted so that identity theft issues can be tracked and analyzed for trends and patterns. 

Alistair M. Nevius ( anevius@aicpa.org ) is the JofA’s editor-in-chief, tax.

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