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March 28, 2012 Tax Watch: "Tax fraud through identity theft has become an ordinary street crime," says Bill Nelson, D-Fla. "All the fraudster has to do is file a false return electronically, and then have the tax refund loaded onto a prepaid debit card. They never have to use a real physical address or even open a bank account, so the thief is nearly impossible to track down.”

IRS Says Tax-Related Identity Theft Is Rising

  • 3/28/2012

IRS Says Tax-Related Identity Theft Is Rising

"Tax fraud through identity theft has become an ordinary street crime," Bill Nelson, D-Fla., chairman of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth, told a panel of witnesses during a March 20 hearing on the IRS’s response to the problem.

"All the fraudster has to do is file a false return electronically, and then have the tax refund loaded onto a prepaid debit card. They never have to use a real physical address or even open a bank account, so the thief is nearly impossible to track down," said Nelson.

The number of identity theft cases the IRS received between 2009 and 2011 nearly tripled. The Congressional Research Service says the IRS saw a five-fold increase in tax-related identity theft incidents from 51,702 in 2008, to 248,357 in 2010. According to the most recent data, the IRS is tracking nearly 300,000 identity theft cases as of March 7, 2012.

The IRS has new identity theft screening filters in place to improve its ability to spot false returns before they are processed and before a refund is issued. Deputy IRS Commissioner for Services and Enforcement, Steven Miller, told the Senate panel that the IRS is issuing special identification numbers (Identity Protection Personal Identification Numbers or IP PINs) to taxpayers whose identities are known to have been stolen, to facilitate the filing of their returns, and prevent others from utilizing their identities. IRS agents are also leveraging mechanisms to stop the growing trend of fraudulent tax returns being filed under deceased taxpayers’ identities.

But the problem persists and will continue, despite their best efforts. Nina Olson, IRS national taxpayer advocate, says the IRS will need more resources and time to handle returns. "We may need to ask all taxpayers to wait longer to receive their tax refunds," Olson told lawmakers.

Nelson is not waiting, as his home state of Florida has been especially hard hit by tax-related identity theft. He introduced the Identity Theft and Tax Fraud Prevention Bill (Sen 1534), which would give the IRS and identity theft victims the means to better detect and prevent tax fraud through identity theft. "I am pleased that the IRS has already implemented some of these reforms," said Nelson.

Specifically, the bill would:

  • Strengthen penalties for tax fraud through identity theft and the improper disclosure of taxpayer information.
  • Give all ID theft victims a unique personal identification number (PIN) to include on their tax returns to prevent fraud and avoid tax refund delays.
  • Allow identity theft victims to "opt out" of the electronic filing of their federal tax returns.
  • Secure the Social Security numbers of deceased persons so that criminals cannot use them to file fake tax returns.

In addition, the legislation would reallocate IRS resources for tax fraud prevention and detection, improve coordination, cooperation, and communication between the IRS and local authorities in criminal investigations, and permanently extend the authority for the IRS to share information with federal and state prison authorities.

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