Stolen Identity Refund Fraud or SIRF is a growing $6 billion a year epidemic.
By contrast, only about $30 million is lost in around 5,000 bank robberies each year. Stolen identity tax fraud is the equivalent of 5 million bank robberies with a 20% success rate or 1 million successful robberies a year. Why rob banks if you can steal more in your pajamas?
WSJ: The U.S. Internal Revenue Service paid an estimated $5.8 billion last year in fraudulent refunds related to identify theft according to a government report. The agency is now looking at several methods to improve taxpayer authentication, but says it is hampered by hundreds of millions of dollars in budget cuts.
TheHill: Koskinen said the agency is working with 13,000 fewer people this tax season and stands to lose an addition 2,000 to 3,000 people with proposed budget cuts.
NBC: And the problem—which the agency admits is growing quickly—is compounded by an outdated fraud-detection system that has trouble identifying many attempts to trick it.
"The flaws in [the IRS'] system are so basic," said Akli Adjaoute, founder and CEO of artificial intelligence firm Brighterion.
"The whole system is a disaster," Adjaoute said.
Fortunately there are workable solutions. Unfortunately the IRS can't afford to try them because the GOP
cut another $200 million from its IT budget in 2015 for purely political reasons.
Jared Bernstein: By cutting the IRS budget, Congress ensures that the $385 billion annual tax gap — that’s the estimated difference between taxes owed and taxes paid — remains in place. According to Treasury Department estimates, each additional $1 spent on IRS enforcement yields $6 of additional revenue. In this regard, whacking the IRS budget works to preserve and potentially expand a big tax cut, albeit an illegal one. That gap represents 11 percent of this year’s spending, implying that the failure to collect revenue that’s owed adds significantly to the budget deficit, another reminder of how some of these alleged budget hawks are really chicken hawks.
Now you get the idea? Your identity was just stolen? Sorry politics is more important.
Identity Pins for authentication are one known workable solution.
ABC: There is a six-digit Identity Protection PIN (IP PIN) that helps the IRS protect identities. However, it is only available to fraud victims, and residents of Florida, Georgia, and the District of Columbia.
The agency wants to make it nationwide, but has faced millions in budget cuts.
Other unfunded proposals include device identification and tax payer authentication:
GAO: While it is likely that no one tool will stop all attempts at fraud, we have found that implementing strong preventive controls can help defend against invalid refunds, increasing public confidence and avoiding the difficult “pay and chase” aspects of recovering invalid refunds.29
Recapturing a fraudulent refund after it is issued can be challenging—if not impossible—because identity thieves often spend or transfer the funds immediately, making them very difficult to trace. For this reason, IRS is in various stages of exploring several possible pre-refund tools. Three tools with significant potential are (1) pre-refund Form W-2, Wage and Tax Statement (W-2) matching (which we already noted was the subject of our August 2014 report), (2) device identification, and (3) improved taxpayer authentication.
Requiring employers to submit data earlier will help identify fraud
WSJ: The deadline for employers to submit W-2s to the government would be accelerated to Jan. 31 under President Barack Obama’s proposed budget.
Requiring these and other documents to be submitted earlier in the year “would assist the IRS in identifying fraudulent returns and reduce refund fraud, including refund fraud related to identity theft,” IRS Commissioner John Koskinen said in written testimony to the Senate Finance Committee earlier this month.
TheHill: “The IRS often uncovers an incident of identity theft before the victim does when a data thief files a fraudulent tax return using a stolen SSN,” he said. “Unfortunately, the agency has interpreted privacy laws as prohibiting the IRS from warning taxpayers that their SSN may have been stolen.”
Last session, Warner and Sen. Ron Johnson (R-Wis.) introduced legislation that would allow the IRS to alert taxpayers when they have been victims of identify theft. The bill never made it out of committee, but Warner said he’s hoping the IRS will be able to address this issue without congressional action.
In his letter, Warner asked whether the agency has considered steps to allow employers to increase the number of electronically filed W-2s and how delaying refunds or delaying the start of the filing season would affect the agency’s ability to identify fraud.
In its report the GAO recommended Congress accelerate W-2 deadlines to Jan. 31.
Increasing not slashing enforcement might help, too.
IRS: Here are a few examples of what these cuts will mean this year:
Delays to critical IT investments of more than $200 million. Impact: This will hurt taxpayer service and cost-efficiency efforts as well as reduce outside contractor support for critical projects.
This means that new taxpayer protections against identity theft will be delayed.
Enforcement cuts of more than $160 million. Impact:
As a result of the hiring freeze, we will lose about 1,800 enforcement personnel through attrition during FY 2015.
The reduced enforcement staffing for just FY 2015 means the government will lose at least $2 billion in revenue that otherwise would have been collected.
Other initiatives like limiting payments to pre-paid debit cards need to be pursued.
IRS: For 2015, the IRS will continue to increase both the number and efficiency of the identity theft data models and filters that are used to identify potentially fraudulent returns. These pre-refund filters stop the vast majority of fraudulent returns. Additionally, the IRS continues to expand its partnerships with financial institutions to identity and stop fraudulent refunds.
Starting January 2015, the IRS also will limit the number of direct deposit refunds to a single financial account or pre-paid debit card to three. Fourth and subsequent valid refunds will convert to paper checks and be mailed to the taxpayer. The limit also will stop certain tax preparers who improperly deposit client refunds into their own accounts.
The bottom line is that stolen identity refund fraud is a $6 billion dollar a year cost to taxpayers that the short sighted
GOP efforts to defund the IRS are only making worse.