IRS challenged by identity theft

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A push by the Internal Revenue Service to deliver tax refunds more quickly has had the unintended consequence of fostering identity theft, a tax agency official said Oct. 10.

"People are actually filing, and getting their money early--and often," said Sharon James, the director of cyber architecture and implementation at the IRS, while speaking at an AFCEA-Bethesda morning event.

Identity verification "has proved a significant challenge for us," James said.

The IRS said it detected 938,664 returns involving identity theft claiming tax refunds worth $6.5 billion during 2011, but the Treasury Inspector General for Tax Administration in a July report (.pdf) says the agency didn't uncover an additional 1.5 million potentially fraudulent tax returns worth more than $5.2 billion.

A more recent TIGTA report (.pdf)--dated Sept. 10 and released only earlier this month--also found that the tax agency destroyed reports of identity theft without notifying the person who filed the report.

Individuals who went to a Taxpayer Assistance Center to report suspected identity theft were incorrectly told to utilize a particular form until this past April, auditors say, and confusing information on IRS.gov also led would-be identity fraud reporters to use the same incorrect form.

A statistical sample of 530 of the forms, 3949-A, showed that 21 percent were made in an attempt to report identity theft.

In December, approximately 3,000 3949-A forms used to report identity theft were destroyed per IRS procedures that required the clerical unit that received the reports to either route them to the correct office for action or hold them for 90 days and then throw them out.

Auditors say clerical unit staff tried to establish new procedures for routing the wrongly filed reports to the Identity Protection Specialized Unit, but the latter refused to accept the forms. Eventually in March 2012, the IRS established a process to permit 3949-As to be used as an identity theft report, but only if accompanied by a police report and state or federal identification. Those requirements, auditors note, are inconsistent with procedures for the correct document, Form 14039, which doesn't require a police report.

Confusingly, 3949-A is the correct form for when a taxpayer wants to report that a dependent's identity has been stolen.

For more:
- download the Sept. 10 TIGTA report, 2012-40-106 (.pdf)

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