IRS Struggles to Deal with Increasing Tax Related Identity Theft

Jun 29, 2011   

As we previously reported here, National Taxpayer Advocate Nina Olson reported numerous problems with the Internal Revenue Services (IRS) reliance on automated customer service available through Taxpayer Assistance Centers (TACs). Among the consequences of this reliance is the IRSs inability to effectively respond to tax related identity theft. Olson noted that the IRSs Identity Theft Protection Specialized Unit is struggling to manage theft cases. In fiscal year 2009, the unit handled approximately 80,000 cases while during October 1 through May 7 of fiscal year 2010 it handled more than 127,000 cases.

Government officials told Congress on May 25th that although curbing identity theft is a top priority for the IRS, there are several other obstacles in fighting tax fraud, including “fiscal constraints and balancing taxpayer impact.” Among other steps taken to prevent tax related identity theft, the IRS has created a system that flags known identity theft victims and a centralized unit to give aid to those affected. According to the IRS Deputy Commissioner for Operations Support, Beth Tucker, the IRS has developed “a comprehensive identity theft strategy that is focused on preventing, detecting, and resolving instances of tax-related identity theft crimes.”

Senator Bill Nelson (D-FL) initiated a hearing for the Subcommittee on Fiscal Responsibility and Economic Growth after considering several cases in his state. He hoped the hearing would help lay the foundation for congressional action. At the hearing, victims testified about how their identities were stolen and how the IRS and other agencies handled the processes. The witnesses discussed problems in communicating with multiple government workers and how the cases were deemed irresolvable. Senator Nelson also sent a letter to the Treasury Inspector General for Tax Administration to launch an investigation into the issue, which has since begun.

According to James White, Director of Tax Issues for the GAO, the IRS does not learn about the crime until after fraudulent returns have been filed, long past the initial theft. In the case of employment tax fraud, the IRS and victims may not know about the theft until over a year later. As discussed by Tucker, “by the time we detect and stop a perpetrator from using someone else’s personal information for his own benefit, the taxpayer-victim’s personal data has already been compromised outside the tax filling process.”

The IRS referred 41 cases dealing with approximately 55,000 individual accounts to the Department of Justice for criminal action in 2010. However, IRS criminal investigators have other areas to investigate, limiting the amount of resources dedicated to identity theft. Privacy laws can also prevent the IRS from alerting law enforcement officials to scams because tax returns and IRS information are confidential.

In January of 2011, the IRS started issuing personal identification numbers (PINs) to taxpayers who had been flagged as identity theft victims. About 56,000 taxpayers received PINs. As discussed by Tucker, the IRS will evaluate the success of the program. The program is meant to avoid delays in filing and processing tax returns. If the program is successful, it will be expanded to include more taxpayers beginning next filing season.

On June 9, the IRS said it is expanding its ability to flag identity theft used to file fraudulent tax returns or employment forms and is moving toward a “forward-looking approach to the problem.” Following IRS Commissioner Douglas Shulman’s remarks at the National Press Club in April, David Knight, the manager for the Pre-Refund Program Office for Earned Income Tax Credits, said that the IRS is attempting to integrate an approach that would “get information from third parties before individuals file tax returns so that it can reject forms with information that does not match.”

In 2010, identity theft overtook credit card fraud as the most common type of fraud. There were more than 470,000 incidents of identity theft that affected more than 350,000 taxpayers. The Pre-Refund Program Office coordinates and oversees pre-refund activities across all IRS functions in order to stop fraudulent returns from being issued. The Pre-Refund Program Office created the Identity Protection Specialized Unit as a central unit to handle identity theft victims.

The IRS has also begun to work with prisons after discovering that a large amount of identity thefts were originating from prisons. The IRS hopes to have disciplinary hearings for prisoners who commit these crimes. The IRS is also working with the Department of Justice to prosecute these cases.

If you are a victim of identity theft, have any questions regarding IRS procedures, or any tax provision, please contact Fuerst Ittleman, PL at