Identity Theft and Tax Fraud: Growing Problems for the Internal Revenue Service, Part 4

10:00 A.M. in 2247 Rayburn House Office Building

The purpose of today’s hearing is to address the serious and rapidly growing problem of identity theft related tax fraud.  This is the fourth hearing the Subcommittee has had this Congress on this important issue, and it will continue our examination of how fraud is occurring and what can be done to stop it.  We will review the Internal Revenue Service’s (IRS) actions to prevent and detect identity theft tax fraud, and evaluate what more can be done to reduce the problem and assist victims.

Identity theft-related tax fraud occurs when a fraudster uses stolen information to file a fraudulent tax return in the victim’s name.  If the victim has not filed a tax return yet, the fraudster can file a return and end up receiving a tax refund from IRS.  When the legitimate taxpayer goes to file a tax return, it may be flagged by IRS as a duplicate claim.  Many victims are unaware that their identities – and in many cases, their tax refunds – have been stolen until they file their own return and are notified that someone else has already filed in their name.  It can take months or even years for IRS to resolve cases of identity theft and issue a tax return to the legitimate taxpayer.

In the last few years, the number of incidents of identity theft-related tax fraud has drastically increased from about 51,700 cases in 2008 to over 1.1 million cases in 2011.  This number represents only the known cases of identity theft.  The total number of incidents that go undetected is unknown, but the Treasury Inspector General for Tax Administration, or TIGTA, says the number could be much higher.  In TIGTA’s review of tax returns filed in 2011, TIGTA identified an additional 1.5 million potentially fraudulent returns that were not detected by IRS.

TIGTA and the Taxpayer Advocate have also raised concerns that victims of identity theft do not receive adequate assistance from IRS.  In June 2011, this subcommittee heard from three witnesses who had been victims of identity theft and learned that their interactions with IRS were often uninformative, frustrating, or discourteous.  One witness stated that, “the way I feel I have been treated by the IRS system has made me a victim a second time.”  IRS has made efforts to improve its assistance to victims, including creating a Taxpayer Protection Unit and providing better training to their employees.  However, there are still significant problems that must be addressed to ensure victims get the assistance they need.

In addition to its impact on victims, identity theft related tax fraud results in a significant loss to the U.S. Government and taxpayers.  TIGTA estimates that IRS could issue $21 billion in fraudulent tax refunds over the next five years resulting from identity theft.  The average amount of a fraudulent tax refund is only about $3,400, so it is often difficult or impossible for IRS to devote resources to investigate every case.  Some fraudsters manage to collect millions of dollars through multiple refunds, though.  Given the severity of the problem, we must work to find better deterrents to fraud.

Another key problem is the lack of information IRS has about identity theft related tax fraud.  The Government Accountability Office (GAO) has raised concern that IRS needs better performance measures and data collection to help assess the effectiveness of its initiatives to stop fraud.  IRS agreed with GAO’s recommendation, but there is still a shortage of information about this problem.  IRS is also failing to take advantage of information it already possesses, including case files of victims of identity theft.  Once a case has been resolved, files are deleted without IRS using this information to identify trends or study them for ways to detect and prevent future fraud.

IRS has launched several pilot programs to combat fraud, and we will hear about them today.  One is a Personal Identification Number or PIN, which is given to victims of identity theft.  This PIN is used by the victims to identify their returns and add an extra level of security to the legitimate return.  IRS also just finished its first pilot of a program designed to share sensitive taxpayer information with local law enforcement officials in order to better investigate fraud.  IRS tested this pilot in Florida, and in October IRS expanded the pilot program to eight additional states, including my state of Pennsylvania and Mr. Towns’s state of New York.

IRS is working to stop the rise of identity theft related tax fraud and to better detect and prevent fraud.  We appreciate their efforts and have followed their work closely throughout this Congress.  However, this continues to be a serious problem and continued oversight is needed.  Today we will hear from our panel of experts on how to combat identity theft related tax fraud, and how to better assist the victims of this fraud.  I look forward to their testimony and want to thank all of our witnesses for their dedication and work in this area.