The Internal Revenue Service continues to battle against the rising tide of identity theft saying that it recently completed what it called a massive national sweep targeting 389 suspects in 32 states and Puerto Rico. The IRS Criminal Investigation unit the total number of identity theft investigations to more than 1,460 since the start of the federal 2012 fiscal year on Oct. 1, 2011.
In addition to the criminal actions, IRS auditors and criminal investigators conducted a special compliance effort starting on Jan. 28 to visit 197 money service businesses to help make sure these businesses are not assisting identity theft or refund fraud when they cash checks. The compliance visits occurred in 17 cities the IRS labels "high-risk" such as New York, Philadelphia, Atlanta, Tampa, Miami, Chicago, Houston, Phoenix, Los Angeles, San Diego, El Paso, Tucson, Birmingham, Detroit, San Francisco, Oakland and San Jose.
The identity theft push over the last several weeks reflects a wider effort underway at the IRS. Among the highlights:
- The number of IRS criminal investigations into identity theft issues more than tripled in fiscal year 2012. The IRS started 276 investigations in fiscal year 2011, a number that jumped to 898 in fiscal year 2012. So far in fiscal year 2013, there have been more than 560 criminal identity theft investigations opened.
- Total enforcement actions continue to rapidly increase against identity thieves. This category covers actions ranging from indictments and arrests to search warrants. In fiscal year 2012, enforcement actions totaled 2,400 against 1,310 suspects. After just four months in fiscal 2013, enforcement actions totaled 1,703 against 907 suspects.
- Sentencing of convicted identity thieves continue to increase. There were 80 sentencing in fiscal year 2011, which increased to 223 in fiscal year 2012.
- Jail time is increasing for identity thieves. The average sentence in fiscal year 2012 was four years or 48 months - a four-month increase from the average in fiscal year 2011. So far this fiscal year, sentences have ranged from 4 to 300 months.
- By late 2012, the IRS assigned more than 3,000 IRS employees - over double from 2011 - to work on identity theft-related issues and the IRS has trained 35,000 employees who work with taxpayers to recognize identity theft indicators and help people victimized by identity theft.
While the moves are significant, it seems like the agency is paddling against a tsunami with a canoe.
In September 30, 2012, the IRS had identified almost 642,000 incidents of identity theft that impacted tax administration in 2012 alone, an almost three-fold increase over 2011 and a rate almost six times (47,730 incidents) that of 2008 when the fraud was initially tracked, according to a Government Accountability Office report.
IRS officials told the GAO that one of the challenges they face in combating identity fraud is its changing nature of the crime and how it is concealed. For example, IRS officials described several areas where the extent and nature of identity theft is unknown.
- § Total number and cost of fraudulent returns. IRS does not know the full extent of the occurrence of identity theft. Officials said that they count the refund fraud cases that IRS identifies but that they do not estimate the number of identity theft cases that go undetected.
- § Identity of the thieves. Unless IRS pursues a criminal investigation, IRS generally does not know the real identity of the thieves.
- § Whether a fraudulent return is an individual attempt or part of a broader scheme. Identifying new schemes or significant cases, such as one thief using numerous taxpayer identities, depends on analysts noticing patterns or other indications that a few cases may be part of a larger scheme. As a result, some schemes or cases involving multiple taxpayers may go undetected.
- § Characteristics of known identity theft returns. IRS officials told us that the agency does not systematically track characteristics of known identity theft returns, including the type of return preparation (paid preparer or software), whether the return is filed electronically or on paper, or how the individual claimed a refund (check, direct deposit, or debit card).
- § IRS captures data on the amount of money it recovers from all types of fraudulent returns, but it does not distinguish whether the type of fraud was identity theft or some other type of fraud. In some cases, external entities, such as banks or other agencies, may notify IRS of potential refund fraud, including suspected identity theft-based refund fraud. IRS reported it had received information from 116 banks and external leads on more than 193,000 accounts between January 1 and September 30, 2012, for all types of refund fraud. IRS reported that banks and other external entities returned almost $754 million dollars during this period.
Another challenge is prosecuting confirmed identity thieves. While the number of cases has obviously grown, the prosecution of these thieves has not even scratched the surface. For example according to the GAO, only 898 cases in 2012 have had formal criminal investigations been instigated. The IRS typically only goes after "the most egregious and significant identity theft cases, as measured by volume and refund amounts," the GAO stated.
An audit of the IRS in 2012 found that the agency stands to lose as much as $21 billion in revenue over the next five years due to identity theft. The Treasury Inspector General for Tax Administration (TIGTA), which is part of the US Treasury. According to an IDG News Service story, TIGTA stated at the time that the IRS did not agree with the $21 billion figure, but wrote that the figure does include estimated savings from new fraud control filters. Without new controls, TIGTA estimated losses of $26 billion. Part of problem is that the IRS is not gathering enough data about fraud trends, such as how a return was filed, income information from W-2 forms, the amount of refunds and where those refunds were sent, TIGTA said. "We found that $8.1 million in potentially fraudulent tax refunds involved tax returns filed from one of five addresses," the audit said.
For its part the IRS has taken a number of steps to combat the problem. For example, the GAO notes the IRS developed new filtering processes in 2012 to detect identity theft based on the characteristics of incoming tax returns that do not rely on a duplicate filing or self-identification by filers.
"Identity theft indicators-also known as account flags-are a key tool used to resolve and detect identity theft. Identity theft indicators speed resolution by making a taxpayer's identity theft problems visible to all IRS personnel with account access. In some cases, IRS uses its identity theft indicators to screen tax returns filed in the names of known identity theft victims. If a return fails the screening, it is subject to additional IRS manual review, including contacting employers to verify that the income reported on the tax return was legitimate."
The IRS said it has made a significant increase for the 2013 tax season in the number and quality of identity theft screening filters that spot fraudulent tax returns before refunds are issued. The IRS has dozens of identity theft screens now in place to protect tax refunds. These efforts helped the IRS in 2012 protect $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011, the IRS stated.
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