IRS stops billions in identity theft refunds but needs data earlier, report says

The IRS stopped $7 billion in fraudulent refunds in calendar years 2024 and 2025, and it could prevent more fraud if it had earlier access to key information returns, according to an audit report from the Treasury Inspector General for Tax Administration (TIGTA).

In the report dated May 13, TIGTA said the IRS selected about 7.5 million individual tax returns through its identity theft filters during the two-year period. Those filters, which screen returns before refunds are issued, use characteristics of known and emerging fraud schemes to flag suspicious filings.

TIGTA noted that the IRS “continually evaluates identity theft filters to improve detection and prevention,” adjusting criteria and thresholds as new risks emerge.

An unintended consequence of changing identity filters is that they identify more legitimate tax returns for potential identity theft, the report said. And resolution of identity theft cases takes an “unacceptably long” time, with an average wait time of nearly two years, National Taxpayer Advocate Erin Collins said in her report to Congress on the 2025 tax season.

The IRS ended fiscal year 2025 with 316,000 unresolved identity theft cases, she said.

The IRS slightly reduced the share of legitimate returns caught in its identity theft filters, lowering false selections from 55% in processing year 2023 to 52% in processing year 2024, the TIGTA report said.

Although the percentage remains high, TIGTA emphasized that legitimate selections represent a small fraction of all returns filed. For example, in calendar year 2024, the identity theft filters selected 2.4 million legitimate tax returns, which is 1.4% of the 163.5 million tax returns filed that year.

The IRS resolved 955,000 identity theft filter selections in 2024 and 2025 without contacting taxpayers. When authentication was required, the IRS posted returns within an average of 13 days after taxpayers verified their identities, the audit said.

The report highlighted the continued value of the IRS’s partnership with the Information Security Analysis Center (ISAC), a public-private collaboration involving state tax agencies, financial institutions, and tax industry partners.

ISAC alerts led the IRS to stop $9.2 million in confirmed identity theft refunds in fiscal year 2024 and identify an additional $49.3 million in potentially fraudulent refunds. Since its launch in 2017, the ISAC program has contributed to nearly $277.7 million in “protected revenue,” the audit said.

Delayed information returns

While identity theft detection has improved, TIGTA found that the IRS cannot fully apply its prerefund fraud filters to certain income types because information returns are not available early in the filing season.

During the 2024 filing season, as of April 15, the IRS did not yet have information returns for:

• 15 million (75%) of the 20 million returns reporting income on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., tied to over $46 billion in refunds.
• 1 million (77%) of the 1.3 million returns reporting income on Form W-2G, Certain Gambling Winnings, tied to $3.6 billion in refunds.

Because Forms 1099-R and W-2G are not due until March 31, the IRS cannot match many early-filed returns against third-party data, limiting its ability to detect questionable refund claims before issuing payments, the report said.

TIGTA estimated that accelerating the filing deadline for these forms could increase protected revenue by $944 million over fiscal years 2025–2034.

Recommendation and IRS response

TIGTA recommended that the IRS work with Treasury to seek legislation that would move up the filing deadline for information returns that currently have a March 31 due date. The IRS agreed, noting that it has previously submitted similar legislative proposals.

Having “a more complete universe of data available … would significantly enhance our ability to stop improper claims from being paid,” the IRS said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.