Identity Theft Still Costs the IRS Billions

“Identity theft continues to be a serious problem with devastating consequences for taxpayers and an enormous impact on tax administration,” said J. Russell George, Treasury Inspector General for Tax Administration. “Identity theft continues to be a serious problem with devastating consequences for taxpayers and an enormous impact on tax administration,” said J. Russell George, Treasury Inspector General for Tax Administration. Charles Dharapak/AP

Identity thieves continue to outfox the Internal Revenue Service at a cost to the government of billions of dollars and with collateral damage to the public expectations of tax fairness, a watchdog report released Thursday found.

There were about 1.1 million potentially fraudulent tax refunds during fiscal 2011, worth about $3.6 billion, according to the Treasury Inspector General for Tax Administration. This amount, however, is an improvement over the estimated $5.2 billion in fraudulent refunds estimated for fiscal 2010.

“Identity theft continues to be a serious problem with devastating consequences for taxpayers and an enormous impact on tax administration,” said J. Russell George, Treasury Inspector General for Tax Administration. “Undetected tax refund fraud results in significant unintended federal outlays and erodes taxpayer confidence in the federal tax system.”

Identity thieves, often using another person’s Social Security number, were the top-ranked topic of complaint to the Federal Trade Commission in 2012. The problem is reported to be most severe in Florida, followed by Georgia and California. Past TIGTA reports have traced the problem to the tax agency’s “delayed access to third-party income and withholding information and multiple tax refunds deposited to the same bank account.”

Currently, the new report said, cases of identity theft are not resolved in a timely manner, which visits additional hardship on victims. The IRS took an average of 312 days to resolve the 100 cases TIGTA reviewed, and of those, 24 percent were in process for more than 365 days, some as long as 1,329 days.

In addition, as many as one-quarter of the cases were resolved incorrectly. “The errors in account resolutions resulted from the lack of clear procedures and training provided to assistors working these cases,” the report said. Cases also were frequently reassigned within IRS staff, sometimes with 10 different “assistors” on one case.

TIGTA recommended that IRS improve training and specialization among staff and institute clearer processes for verifying data accuracy. Agency managers largely agreed with the recommendations, though they said they are confident that staffing improvements for 2013 are already reducing turnaround times.

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