TIGTA: IRS should safeguard taxpayers from identity theft

The Internal Revenue Service needs to do more to combat identity theft, which is increasingly being used to commit tax fraud and obtain employment, the Treasury Inspector General for Tax Administration (TIGTA) said in a report released today. The IRS primarily focuses on public outreach — which it has improved — to prevent identity theft by educating people, but that is not an adequate deterrent, the report also said. “The IRS has placed only limited emphasis on employment-related and tax fraud identity theft,” said J. Russell George, the Treasury Department's inspector general for tax administration. “The IRS' policy…that identity theft will only be investigated if it is committed in conjunction with other criminal offenses is having a large tax impact,” he said. The IRS does not include pursuing individuals using another person’s identity as part of its prevention strategy unless their cases directly relate to a substantive tax or conspiracy violation, and then the Criminal Investigation Division investigates the crime of identity theft, the report stated. “We are concerned that if the IRS takes no additional action to stop further use of another person’s identity, then there is no deterrent to keep the problem from spreading,” George said. The service told TIGTA it does not have sufficient enforcement resources to address most of these cases. Further, because of concerns about data reliability, it does not use the Federal Trade Commission (FTC) Identity Theft Clearinghouse to evaluate whether additional actions are needed to address complaints of tax-related identity theft, TIGTA said. The number of fraudulent tax returns filed as a result of identity theft increased 579 percent from 2002 to 2007, and the number of complaints resulting from employment-related identity theft more than doubled during the same time period, George said. In 2007, FTC received 56,125 complaints of identity theft related to the filing of a fraudulent tax return or the misuse of someone’s identity to obtain employment. “Clearly, identity theft is a growing national problem that affects both taxpayers and tax administration," George said. TIGTA recommended that the IRS coordinate internally to develop and implement a strategy to fight identity theft, including coordinating with other agencies such as FTC and the Social Security Administration to evaluate and investigate identity theft allegations related to tax administration. In its response to TIGTA, the service has begun to update its strategies to make its efforts more efficient and effective, said Richard Spires, IRS deputy commissioner for operations support. For example, it has implemented a universal identity theft indicator, including business rules to apply unique treatments to cases where the indicator is present. “The universal identity theft indicator provides the IRS with comprehensive data from all program areas impacted by identity theft, giving us a tool to determine the impact that identity theft has on tax administration,” he said. As of mid-February, the service had applied the indicator to 887 accounts since the code became available in January, Spires said.