Failures by the Internal Revenue Service to detect identity theft cost the government $3.6 billion in 2012. Scary thing is, that's 30% less than in 2011, according to the Treasury Department's Tax Administration inspector general.
Despite getting much better at preventing it than in previous years, the IRS still allowed refunds claimed on 1.1 million tax returns filed under stolen Social Security numbers in 2012, said the office of the Treasury Inspector General for Tax Administration (TIGTA), in its report.
A significant contributor to the overall U.S tax gap, "Undetected tax-refund fraud results in significant unintended federal outlays and erodes taxpayer confidence in the federal tax system," TIGTA wrote.
The TIGTA report showed the IRS also incorrectly paid out $385 million in refunds claimed on 141,000 returns filed under stolen individual taxpayer identification numbers (ITINs).
Individual taxpayer identification numbers (ITINs) are typically issued by the IRS to workers who do not qualify for Social Security numbers. ITINs should not be confused with "Federal Tax ID Numbers," also known as "Employer Identification Numbers (EINs)," which are assigned to businesses.
In a separate report, TIGTA also criticized the IRS for taking an average of 312 days to resolve cases of fraudulent tax returns filed under stolen identities.
"Identity theft is a growing epidemic, and I continue to be troubled by the lengthy case-processing delays and tax-account errors experienced by victims of tax-related identity theft," said Treasury inspector general J. Russell George.
George blamed the delays partially on the IRS policy requiring extra staff members to answer telephone inquiries during the tax filing season rush, and partially on the IRS' failure to fully understand its own processes for dealing with identity theft. According to the report, nearly 75% of the 183 IRS employees interviewed by TIGTA said they found the identity theft procedures confusing.
Many of the stolen Social Security numbers and ITINs used to file the fraudulent tax returns belonged to persons who were no longer required to file returns, thus preventing the IRS from detecting multiple returns filed under the same ID numbers.
What TIGTA Recommended
Treasury inspector general George recommended that the IRS should ensure that its employees assigned to detecting and dealing with identity theft spend all their time doing so, rather than answering phone-in questions.
In addition, he recommended that the IRS develop identity theft processes that were clear and consistent enough for it employees to understand.
According the report, the IRS agreed, as I would suspect, most honest taxpayers.