The IRS needs to do more to combat the growing problem of employment-related and tax-fraud identity theft, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
TIGTA evaluated the effects of identity theft on taxpayers and tax administration. Individuals who steal taxpayer identities affect the tax system in two ways:
- Fraudulent Tax Returns - An individual may use another person's Social Security number (SSN) to file a fraudulent tax return in order to steal a tax refund. Subsequently, the lawful taxpayer would have to prove his or her identity to correct his or her tax liability or refund.
- Misreporting of Income - An individual may use another person's name and SSN to obtain employment. Because income earned is reported to the IRS by the employer, it will appear to the IRS that the lawful taxpayer did not file a tax return that included all of his or her income.
"The number of fraudulent tax returns filed as a result of identity theft increased 579 percent from 2002 to 2007," said TIGTA's Inspector General J. Russell George. "Further, the number of complaints resulting from employment-related identity theft more than doubled during the same time period."
"In 2007 alone, the Federal Trade Commission received 56,125 complaints of identity theft related to either the filing of a fraudulent tax return or the misuse of someone's identity to obtain employment," Inspector General George said. "Clearly, identity theft is a growing national problem that affects both taxpayers and tax administration."
TIGTA's report found that:
- The IRS primarily focuses on combating identity theft through public outreach.
- Identity theft related to tax administration is rarely recommended for prosecution.
- Actions taken by the IRS in response to employment-related identity theft are not adequate to stop the unlawful use of the identity. If a taxpayer's name and Social Security number are used by another person, the IRS does not notify employers and no further action is taken to stop the continued unlawful use of the identity.
- The IRS believes it cannot do more to stop employment-related identity theft cases because: (1) it lacks jurisdiction; (2) the taxes owed are not generally significant; and (3) disclosure rules hinder its ability to share information with employers and other agencies.
"The IRS has placed only limited emphasis on employment-related and tax fraud identity theft," George said. "The IRS's policy is that identity theft will only be investigated if it is committed in conjunction with other criminal offenses having a large tax impact."
In its response to TIGTA's draft audit, the IRS said it will update its strategies to make its efforts more efficient and effective. The full text of the IRS's response can be found beginning on p. 31 of the PDF file.
The Inspector General will discuss this report at a Senate Finance Committee hearing tomorrow (Thursday, April 10) at 10 a.m., Room 215, Dirksen Senate Office Building.