Washington News

At a May 8 Congressional hearing, Treasury Inspector General for Tax Administration (TIGTA) Russell George testified on the rapid growth of identity theft and tax refund fraud. TIGTA produced a major report on May 3, 2012 that outlined in detail the problem with identity theft.

In tax year 2010, there were 2.2 million fraudulent returns. About 940,000 returns involved identity theft. There was $6.5 billion in fraudulent tax refunds from this group.

TIGTA auditors also estimated that there are 1.5 million other returns that involve identity theft. These returns included another $5.2 billion in fraudulent refunds. The total tax fraud due to 2010 identity theft was estimated to be $11.7 billion.

George indicated that the investigation showed that 48,357 Social Security numbers were used multiple times. These stolen Social Security numbers enabled identity thieves to file multiple returns for refunds or to claim excessive deductions for non-existent dependents.

George stated, "When the identity thief files the fraudulent tax return, the IRS does not yet know that the individual's identity will be used more than once. As a result, the tax return is processed and the fraudulent refund is issued. These incidences result in the greatest burden to the legitimate taxpayer."

After the identity thief obtains the false Social Security number, he or she attempts to file the first return using that number. The legitimate taxpayer then has a delay in obtaining a refund because the same number has been used twice.

A typical strategy for an identity thief involves five steps.

1. Social Security Number – Obtain another individual's Social Security Number, often from a hospital, doctor's records or other business source.

2. Debit Card – From a bank or other financial institution, obtain a debit card that can receive the refund.

3. Filing – Attempt to file early be able to use the stolen Social Security number before the legitimate taxpayer.

4. Fictitious Returns – Estimate earnings on the W-2 and other forms on the fictitious return. Frequently, the IRS has sent out the refund before checking the W-2 amounts.

5. Receive the Refund – In many cases the fraudulent refund is credited to the debit card.

IRS Deputy Commissioner for Services and Enforcement, Steven Miller, also testified at the hearing. He indicated that the budget cuts have resulted in a reduction in staff of 5,000 employees at the IRS. Even with this change in number of employees, he stated that the IRS plans to have 2,500 employees working to combat identity theft by the end of Fiscal Year 2012.

Miller concluded, "I can tell you that we have committed our talents and resources to prevent the issuance of fraudulent returns and have developed processes to minimize the pain felt by those who have been victimized."

Congress Calls for Identity Theft Protection

At the Joint Hearing of the House Ways and Means Oversight Subcommittee and the Social Security Subcommittee, leaders from both parties agreed that Congress and the IRS must take significant steps to reduce tax-related identity fraud. The Joint Subcommittee meeting was called by Chairman Charles Boustany, Jr. (R-LA).

He indicated that the federal government must "better protect taxpayer dollars." Boustany continued, "Identity theft allows criminals to file false tax returns and claim thousands of dollars in refundable tax credits. In a recent case in Florida, identity thieves that allegedly obtained $30 million in fraudulent refunds and nearly obtained $100 million more before being caught. They spent the money on expensive cars and homes." Boustany suggested that substantial steps are needed to protect taxpayers from "unprecedented levels" of identity theft.

The ranking member on the Ways and Means Oversight Subcommittee is John Lewis (D-GA). Lewis acknowledged that tax fraud and identity theft are serious problems and the IRS must do more. He noted that the budget cuts and the 5,000 member reduction in staff cause challenges for the IRS in opposing identity theft and tax fraud. The IRS identity theft budget for this year is approximately $330 million. Lewis noted, "We need to provide the IRS with more tools to combat identity theft today."

The Social Security Subcommittee Chairman is Sam Johnson (R-TX). He observed that the Social Security Administration continues to publish the Death Master File. This record of all Americans who have passed away each year is used by many government and financial service companies to ensure that benefits are correctly paid. However, Johnson discussed the case of Alexis Agin, daughter of Mr. and Mrs. Jonathan Agin. Alexis passed away at the age of four. Not only did the Agin family endure the grief of losing a child, but by the end of the year another taxpayer was using her Social Security number to claim a dependent deduction.

Johnson recommends that the Death Master File be subject to restrictions on use. He introduced the "Keeping IDs Safe Act of 2011" to limit the public distribution of the Death Master File.

The fourth leader to speak on the topic was Ranking Member of the Social Security Subcommittee Xavier Becerra (D-CA). He noted that the IRS must process 140 million tax returns in a few months. In his view, it is important to find the "right balance between the use of the Death Master File (DMF) and the efforts of the IRS in opposing identity theft." Becerra stated, "The DMF is helpful in administering benefits and in combating fraud, at both government agencies and in the private sector." He acknowledged that the use of the DMF should be made more restrictive in order to minimize the level of ongoing identity theft.