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GAO: Action Needed to Combat $5 Billion Tax Refund Fraud

September 22, 2014

WASHINGTON – The Internal Revenue Service (IRS) must take bold and innovative action to combat more than $5 billion in fraudulent identity theft tax refunds, according to a new report by the Government Accountability Office (GAO). The report, requested by leaders on the Senate Finance and Aging Committees as well as the House Ways and Means Committee, said the IRS should take additional steps to strengthen its pre-refund and anti-fraud efforts to effectively stop tax refund fraud before it even starts.

“The IRS is not doing enough to protect Americans from the terrible crime of identity theft and fraud,” said House Ways and Means Committee Chairman Dave Camp (R-MI).  “In one case, the IRS received over 2,000 returns from a single address – paying out over $3.3 million in refunds.  That is not just a simple error, that is clear mismanagement.  IRS must ensure that all is being done to stop detect fraudulent payments, protect hard-earned taxpayer dollars, and stop the crime of tax fraud.”

 “The American people should be able to trust the IRS to protect their identities, preserve their privacy, and ensure their hard-earned money isn’t being carelessly flushed down the drain.  Sadly, that’s not the case,” said Finance Committee Ranking Member Orrin Hatch (R-Utah). “As the GAO made clear today, there is more that can be done to improve the agency’s anti-fraud capabilities. Moving forward, I hope the IRS will take a serious look at these recommendations and work with Congress to implement smart safeguards that not only better serve the victims of identity theft refund fraud but, ultimately, stop it before it even starts.”

“By the time IRS matches all of the payroll information it collects with the tax returns it receives, billions of dollars in fraudulent refunds have already been sent out the door.  This is a serious and unacceptable issue that must be addressed now,” said Finance Committee Chairman Ron Wyden (D-Ore.). “This GAO report is an important step forward as it makes a number of important recommendations for verifying that taxpayers are getting the refunds they deserve and that the fraudsters don’t get them instead.   I’m working closely with my colleagues here in the Congress and with the IRS to fight this serious and growing problem that hurts both citizens and the integrity of our tax administration.”

“This problem isn’t going away, unless we go hard after these criminals while also doing what we can to prevent this crime,” said U.S. Sen. Bill Nelson (D-FL), chairman of the Aging Committee and a proponent of various initiatives to curb ID theft and tax fraud. “Too many Americans already have paid a high price, especially those unfortunate enough to have fallen victim to identity theft.  Many of them sometimes end up waiting years just to get their own tax refund.  The time has come for Congress to act.”

“Despite efforts to prevent tax refunds from being paid to con artists who have stolen the identities of taxpayers, the IRS paid $5.2 billion in refunds based on fraudulent tax returns in 2013,” said U.S. Senator Susan Collins (R-Maine), Ranking Member of the Senate Aging Committee. “These fraudulent tax refund payments waste taxpayer dollars and jeopardize the legitimate refunds of taxpayers.  The IRS must do more to prevent fraudulent tax refunds from being paid to fraudsters rather than to their rightful claimant.”

Identity theft (IDT) refund fraud occurs when a fraudster files a false tax return using a stolen Social Security number and other personal information and receives a tax refund from the IRS.  The IRS estimates that in 2013, it paid $5.2 billion in fraudulent IDT refunds. 

GAO and the IRS both agree that this large problem is an evolving threat as fraudsters are adapting to additional controls the IRS has implemented to combat IDT refund fraud.  Fraudsters are able to take advantage of the IRS’ “look-back” compliance efforts, in which the IRS issues tax-refunds before completing all compliance checks. 

GAO recommends that the IRS take additional actions to enhance its pre-refund anti-fraud efforts, as preventing fraud is more effective than “claw-back” recovery efforts.

Key findings from the GAO report follow and a full copy of the report can be found HERE:

  • Bold Action Needed: According to the GAO report, “IRS estimates it issued at least $5.2 billion in fraudulent IDT refunds in filing season 2013.  Given the size and scope of IDT refund fraud, additional bold and innovative steps are needed from Congress and IRS. … Given the billions in dollars of successful IDT refund fraud, IRS must strive to stay one or more steps ahead of identity thieves, or the risk of issuing fraudulent IDT refunds could grow.”

  • Electronic W-2 Filing Threshold Change: According to the GAO report, “Congress should consider providing the Secretary of the Treasury with the regulatory authority to lower the threshold for electronic filing of W-2s from 250 returns annually to between 5 to 10 returns, as appropriate. … Cost savings and the ancillary benefits they provide in supporting IRS’s efforts to conduct more pre-refund matching, a change in the e-filing threshold is warranted.”

  • Moving W-2 Filing Deadlines to Earlier in the Year: According to the GAO, “The Department of the Treasury proposed that Congress accelerate W-2 [submission] deadlines to January 31. … Accelerating the W-2 deadline to January 31 – as proposed by Treasury – would provide a powerful tool for IRS to detect and prevent IDT refund fraud. … IRS should fully access the costs and benefits of shifting W-2 deadlines.”

The Senate Finance and Aging Committees as well as the House Ways and Means Committee have extensively examined the issue of identity theft refund fraud, including its impact on taxpayers and ways to effectively curb the practice. Senators Hatch and Wyden introduced bipartisan legislation, the Tax Refund Theft Prevention Act, to improve the IRS’ anti-fraud capabilities and enhance protections for victims of identity theft refund fraud.