Preventing Potentially Billions of Dollars in ID Theft Tax Refund Fraud

Two things cause stress for just about everybody: taxes and identity theft. And when those two things come together, the result can be a nightmare. For Tax Identity Theft Awareness Week, today’s WatchBlog focuses on how the IRS can combat identity theft refund fraud. A big problem Refund fraud occurs when fraudsters use a stolen Social Security number and other identifying information to file for a tax refund. Then when the legitimate taxpayer files for a refund, IRS lets them know someone has already filed a return using their social security number. Identity theft refund fraud can burden legitimate taxpayers who may wait months for delayed refunds. While the IRS estimated it prevented $22.5 billion in 2014 tax refunds from going to fraudsters who stole someone’s identity, IRS also estimated that it paid $3.1 billion in such fraudulent refunds. Match it up Fraudsters get away with identity theft refund fraud by taking advantage of the IRS’s approach to verifying tax returns. The IRS usually issues refunds months before matching wage information on tax returns with information employers reported on Form W-2. While this approach helps IRS get refunds to taxpayers quickly, it creates a window during which fraudsters can make off with your refund. In 2014, we reported that matching W-2 data to tax returns before issuing refunds could help the IRS combat this type of fraud. And, starting in 2017, employers will have to file W-2s earlier—by January 31. This could give the IRS the time it needs. According to the IRS, a program that would match W-2 data to tax returns before issuing refunds would expand the number of fraud schemes the IRS detects, saving a substantial part of the billions currently lost to fraudsters. The challenge to the IRS is to balance timely refunds to legitimate taxpayers, while protecting against fraud.

(Excerpted from GAO-14-633)

What’s a tax collector to do? While it’s unlikely that one tool could stop all identify theft refund fraud, preventative measures can help the IRS avoid difficult “pay and chase” efforts—trying to recoup the stolen money. Interested in learning more? Check out our work on tax-related identity theft fraud, including

• how enhanced authentication could combat refund fraud,
• how making changes to W-2 filing could help combat refund fraud, as well as
• our financial audit of IRS’s fiscal years 2015 and 2014 financial statements

The Federal Trade Commission and the IRS also have information available on tax-related identity theft fraud.

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•    Questions on the content of this post? Contact James McTigue at mctiguej@gao.gov. •    Comments on GAO’s WatchBlog? Contact blog@gao.gov.