What is Tax Identity Theft?

Now that more people are filing their tax returns electronically, these returns are even more subject to identify theft and tax fraud. The number of identity theft-related fraud cases on tax returns reached 226,000 in 2011, which was a 20 percent increase over 2010.

How it works

How does this happen? There are two situations. The first is the thief steals the victim’s identity including Social Security number and employer. The other is the thief uses the victim’s name and Social Security number to obtain a job and receives a W-2 under the victim’s name. In both cases, the thief files an electronic tax return using the information and requests a refund.  If the thief’s return is submitted prior to that submitted by the victim, the money is refunded to the thief. In many cases, the victim has no idea that their identity has been stolen and their refund given to a thief. Their first knowledge of this is when they are contacted by the Internal Revenue Service, which can be several months later.  The victim is often treated like a criminal, until an investigation is conducted.  They don’t get their refund until the investigation is completed which can take at least 90 days.

IRS process

Thieves are taking advantage of the weakness in the Internal Revenue Service’s electronic filing system.  The Internal Revenue Service doesn’t match the employees W-2 form with the employers W-2 form before refunds are issued.   The matching is done months after April 15.  According to the Internal Revenue Service, it is costly to fix this problem.  It requires money to not only update the processing system but also to change the required date that employers file workers’ income statements to an earlier one.

The Internal Revenue Service has been asked to speed up the returns process and handling claims electronically was one way to do so.  As a result, more identity theft and tax fraud has occurred.  The Internal Revenue Service has to determine more ways to detect phony refund claims, match W-2 forms, and handle refund problems. They are beginning to use new filters to detect fraud, new procedures to flag returns that are suspected to be filed by identity thieves, and correspond with the sender before processing the return. They plan to speed up the handling of the cases, which has taken at least 90 days in the past. Consumer education and employee training are also part of the plan.

According to the Internal Revenue Service, the procedures they are putting into place have had some impact. In 2011, 1.1 million returns were identified as requiring screening for fraud – a 72 percent increase over 2010.  They were able to protect $1.3 billion in refunds from being sent to identify thieves.

It is unfortunate that an agency that collects the revenue for the United States has antiquated systems to handle high tech processes. Hopefully, they will be able to get more processes in place to reduce the fraud. Unfortunately, Congress cut the Internal Revenue Service’s 2012 budget by $300 million to $11.8 billion.

Credit Expert Witness, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Civil Penalty, Credit Report, Financial, Internal Revenue Service, Money & Identity

This post was written by John Ulzheimer