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Efforts Continue to Result in Improved Identification of Fraudulent Tax Returns Involving Identity...

February 9, 2017

TIGTA - 2017-01 Karen Kraushaar, Director of Communications Karen.Kraushaar@tigta.treas.gov (202) 622-6500

Efforts Continue to Result in Improved Identification of Fraudulent Tax Returns Involving Identity Theft; However, Accuracy of Measures Needs Improvement

WASHINGTON -The Internal Revenue Service’s (IRS) efforts continue to result in the

improved identification of fraudulent tax returns involving identity theft; however, additional

steps should be taken to improve the accuracy of some of the IRS’s identity theft estimates,

according to a new report released publicly today by the Treasury Inspector General for Tax

Administration (TIGTA).

Identity theft tax refund fraud occurs when an individual uses another person’s name or other

personal information to file a fraudulent tax return. Unscrupulous individuals use stolen

identities to submit tax returns with false income and withholding documents in order to obtain a

fraudulent tax refund.

The IRS initiated the Identity Theft Taxonomy research project to measure the IRS’s efforts to

defend against identity theft as well as to identify areas requiring additional effort. The IRS

published the first Identity Theft Taxonomy report on September 15, 2014, and updates the

report annually. This audit was initiated to assess the effectiveness of the IRS’s efforts to detect

and prevent identity theft, measure undetected identity theft, and coordinate identity theft

information with other Government agencies and tax industry partners.

In its review, TIGTA found that strategies adopted by the IRS to improve detection and

prevention of identity theft have led to many notable improvements in its efforts. However, as

identity theft continues to evolve and become more sophisticated, the IRS has begun to explore

additional initiatives that would assist with its overall detection and prevention efforts such as

convening a Security Summit, coding of Forms W-2, Wage and Tax Statement, etc.

TIGTA identified continued reductions in the volume of undetected potentially fraudulent tax

returns. For Tax Year 2013, TIGTA identified 568,329 undetected potentially fraudulent tax

returns with tax refunds totaling more than $1.6 billion, a reduction of more than $523 million

from the prior year. However, the false reporting of wages and withholding continues to account

for the largest amount ($1.3 billion) of undetected potentially fraudulent tax return refunds. With

the passage of legislation to accelerate the reporting of Forms W-2, the IRS should be able to

significantly reduce the number of these undetected returns.

Finally, TIGTA found that the accuracy of the Identity Theft Taxonomy quantification for both protected and unprotected revenue could be improved. For example, the IRS’s estimate of protected revenue was overstated by almost $2.4 billion resulting from the incorrect calculation of refunds associated with rejected electronically filed tax returns.

TIGTA recommended that the IRS expand the use of its identity theft models to include all accelerated Forms W-2; develop a process to use State lead data; and update the Taxonomy methodology used to quantify unprotected and protected revenue. The IRS agreed with TIGTA’s recommendations and indicated that they programmed the Return Review Program to include all accelerated Forms W-2 received from the Social Security Administration for the 2016 tax year; implemented a process to use State lead data; modified the methodology for rejected tax returns; updated the Taxonomy methodology to remove duplications of tax returns; and, have plans to further revise the methodology to improve the accuracy of the unprotected identity theft estimates.

“Identity theft continues to have a significant impact on tax administration,” said J. Russell George, Treasury Inspector General for Tax Administration. “As a result, the IRS must continue to evolve and explore other initiatives that will assist with its overall detection and prevention efforts.”

Read the report.