The IRS sharply intensified efforts to fight identity theft and refund fraud this year, including substantially increasing the number and types of filters used to catch potential fraud before refunds are issued. The agency now uses dozens of identity theft screens to detect false returns. The IRS doesn’t disclose what it looks for, but red flags include being a first-time filer, an unusual bump in the refund amount and an unexpected W-2 form, according to Dustin Stamper, director in Grant Thornton’s national tax office in Washington, D.C.
These new filters “ensnare far too many legitimate filers,” according to the National Taxpayer Advocate, an independent branch of the IRS. In its report to Congress in June, the group raised “serious concerns about the currency and effectiveness” of the filters. Using these screens, the IRS marked 356 percent more returns as “unpostable” — meaning a delay of about six weeks in processing — through May 9, as compared to the same period last year, according to the report. Nearly 90 percent of these flagged returns were eventually found to be legitimate.
Delays only affected a minority of taxpayers, with nine out of 10 receiving refunds within three weeks, according to IRS spokesperson Julianne Fisher Breitbeil.
“There’s a careful balance here to make sure tax returns are processed to people who are rightfully owed their money with preventing as many of these fraudulent refunds from going through the system as we can,” she said.
The agency suspended or rejected 4.6 million “suspicious” returns in 2013, said IRS Principal Deputy Commissioner Danny Werfel, speaking at a nationwide tax forum in Dallas on Tuesday.
In 2012, the agency prevented $20 billion in refunds from going to fraudulent returns, compared with $14 billion in 2011.
Congressman John Mica, R-Winter Park, said the IRS should do more to both ensure timely refunds and address fraud.
“IRS failures to address identity theft are evidently hurting taxpayers on two fronts — holding up legitimate returns and still paying thousands and thousands more in fraudulent returns at billions of dollars of costs to taxpayers,” said Mica, a member of the Committee on Oversight and Government Reform who will lead a hearing on fraud related to identity theft on Friday. “Victims of identity theft can’t get the refunds or their credit restored, sometimes for years.”
Once identity theft is detected, the IRS has set a benchmark of six months for resolving cases, and it more than doubled the number of staff dedicated to identity theft issues to 3,000 between 2011 and 2012. Yet the agency still takes six months to a year to resolve most cases, based on data from fiscal year 2012, which is “simply not acceptable for the hundreds of thousands of victims, and almost guarantees that these victims will be caught up in IRS processes for a second filing season,” according to the National Taxpayer Advocate’s report.
“Identity theft has been a complex problem for the IRS, and we’ve made a number of attempts to quicken the response time, such as adding staff and training people, but each case stands on its own,” said Florida IRS spokesman Michael Dobzinski.
Spending cuts and furloughs have pushed back refund processing times, according to the National Treasury Employees Union. The agency’s budget was slashed by nearly $1 billion in two years, including more than $600 million from sequestration, which took effect in March. In the most recent tax season, the IRS had 8,000 fewer employees than two years ago, even as the number of returns increased.