IRS needs funds, policy changes to fight ID theft

The Internal Revenue Service is seeing identity theft attempts escalate at a rapid rate, but faces several obstacles to better enforcement -- some of which are imposed by the government itself.

IRS officials and legislators alike agreed at a Nov. 29 House subcommittee hearing that  "pain points" include the IRS budget, its ability to work with other agencies to use their data files and broader data analytics. Congress decreased the IRS funding in fiscal 2012 by 2.5 percent, or roughly $350 million. Agency officials have tried to ramp up efforts to reduce theft by shifting more than 3,000 employees to deal with identity theft issues, but that shifts staffing away from other critical responsibilities.

While all federal agencies are feeling the effects of tight budgets, hearing participants said additional funding for the IRS would be a viable investment, since it takes in the tax money. IRS overseers estimate the agency could issue $21 billion in fraudulent tax refunds over the next five years because of identity theft, and those are the cases officials know about. For each theft that slips past the IRS, the government has less money to work with.

"We could make a dent in that, if we invest in you," Rep. Gerry Connolly (D-Va.) told Beth Tucker, deputy commissioner for operations support at the IRS, who testified.

Tucker, a 28-year IRS employee, agreed. She estimated a $4 to $12 return on investment for each $1 invested into the IRS identity theft prevention effort.

The House Oversight and Government Reform Committee's Government Organization, Efficiency, and Financial Management Subcommittee held the hearing to address identity theft-related tax fraud. It was the fourth hearing the subcommittee has had on the issue this Congress.

Besides the budget constraints, the IRS is living under restrictions on accessing other agencies' information that are too tight, Tucker and others said. The IRS could benefit from greater use of data files, such as the Health and Human Services Department's National Directory of New Hires' wage information or even the Social Security Administration's Death Master File, which verifies deaths, as means of preventing fraud.

The law currently limits the IRS's use of HHS' information to just those tax returns with a claim for the Earned Income Tax Credit. In addition, the IRS reports it confirmed identity theft on more than 31,000 tax returns claiming fraudulent Social Security benefits. It also withheld and stopped approximately $169 million in fraudulent tax refunds in Processing Year 2012, J. Russell George, Treasury inspector general for tax administration, said at the hearing.

When asked what Congress could do, George said lawmakers should change the law, which "ties one hand behind our back."

With more people and more information, the IRS could get a better handle on identity thefts, which have grown exponentially in recent years. The number of incidents of identity theft-related tax fraud has increased from about 51,700 cases in 2008 to more than 1.1 million cases in 2011.

"People are nimble and they will use their ingenuity if they think they can get away with it," George said.

Nevertheless, the IRS is not fully analyzing the information it already has, according to at least one member of the panel.

"IRS is also failing to take advantage of information it already possesses, including case files of victims of identity theft," said subcommittee chairman Todd Platts (R-Pa.). "Once a case has been resolved, files are deleted without IRS using this information to identify trends or study them for ways to detect and prevent future fraud."

Tucker said the IRS is adding two more filters to the 13 screening filters now in its systems. The new filters look at multiple tax refunds sent to one bank account and refunds going to the same address. By gathering more information, officials can tackle questionable tax returns early on.

"Prevention is key here," Tucker said.