IG: IRS Needs to Better Use Data to Crack Down on Tax Fraud

The Internal Revenue Service headquarters building in Washington.

The Internal Revenue Service headquarters building in Washington. J. David Ake/AP File Photo

The agency doesn't use all the data available to proactively identify fraudulent accounts, an official testified Wednesday.

About two weeks from Tax Day, taxpayers should be especially wary of scams attempting to steal their personal information and file fraudulent returns, a congressional committee warned.

The House’s Small Business Committee on Wednesday probed the inspector general with the Treasury Department's IG for Tax Administration about whether the Internal Revenue Service is equipped to protect taxpayer data from criminals.

Tax fraud is a growing threat, and criminals are getting creative. The IRS has recently published several notices detailing phishing attempts in which criminals pose as customers for tax preparers, requesting last-minute changes to their deposit procedures; or another scam in which criminals pretend to be company executives asking payroll managers for lists of employees and their associated W-2 forms.

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But the IRS “is not using data it has readily available to proactively identify potential business identity theft,” according to a TIGTA report. The agency does use “identity-theft” filters that would flag suspicious tax returns by examining inconsistencies in the “amounts claimed for income and withholding, filing requirements, prisoner status, taxpayer age, and filing history,” the TIGTA report said.

Though he declined to recommend a specific number of filters he thought would be more effective in catching criminals, Inspector General J. Russell George noted the IRS is planning to expand the number and testified the agency is “proactive ... to help produce processes to identify” criminal activity.

The IRS has also struggled to resolve the accounts identified as fraudulent, the report noted. In TIGTA’s analysis of 100 accounts between 2012 and 2013, the IRS took 278 days on average to fix them—and 17 of those were not resolved correctly.

“To be clear, this is not an issue of funding at the IRS,” Committee Chairman Steve Chabot, R-Ohio, said. “It is an issue of priorities at the IRS. If the IRS can pay off big bonuses to its employees, some of whom were implicated in the targeting of Americans for their political views, it should be able to find the money to protect people’s data from identity thieves.”

And if the agency can “prioritize the enforcement of Obamacare over basic customer service, then there really is no excuse for failing to protect taxpayer information from thieves,” he added.

Asked whether the IRS should simply provide notices to taxpayers once their paper returns are filed so they’re immediately aware if someone else has filed on their behalf, George said the agency’s advice has been to “file early so that you beat the bad guy,” which was “extraordinarily troubling.”