IRS and Social Security Urged to Curb Tax Fraud and Identity Theft

The Internal Revenue Service and the Social Security Administration were urged during a congressional hearing Tuesday to take further steps to curb identity theft-related tax fraud.

IRS deputy commissioner of services and enforcement Steven T. Miller acknowledged the problem, but responded that in some cases tax preparers might have bank accounts that receive multiple tax refunds. Families and Indian tribes might also have such accounts.

National Taxpayer Advocate Nina Olson noted that taxpayers might need to wait months longer to get their tax refunds if the IRS were to put in place the proper identity theft safeguards. In some cases, that led to tax refund delays this tax season because of the identity theft filters used by the IRS.

Olson said she is concerned about the IRS’s ability to develop procedures to promptly assist taxpayers who are victimized by identity theft, in part because of how the IRS has handled a related issue involving fraud by tax return preparers. “The IRS has struggled to unwind the harm done to victims—even when it had plenty of time to develop procedures,” she said. “More specifically, [the Taxpayer Advocate Service] has received a significant number of cases involving preparer refund fraud. These preparers alter taxpayers’ returns by inflating income, deductions, credits or withholding without their clients’ knowledge or consent, and pocket the difference between the revised refund amount and the amount expected by the taxpayer. The IRS ultimately discovers that the taxpayer’s return is incorrect and attempts to recover the excess refund from the taxpayer through levies, liens and other enforcement actions. In one egregious instance involving several returns prepared by the same tax return preparer—and despite the IRS’s concurrence that the returns it processed were not the returns signed by the taxpayers—our Local Taxpayer Advocate could not persuade the IRS Accounts Management function to adjust the taxpayers’ accounts to remove the fabricated income or credits.”

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