Tax and Accounting Profession Joins the Fight against Tax Refund Fraud

February 25, 2019

Identity theft is one of the fastest growing crimes in America, with the Federal Trade Commission estimating as many as 9 million Americans have their identities stolen each year. And tax refund fraud—filing a tax return in the name of a victim to collect a tax refund—was the most common form of identity theft for the past five years.

Over the last several years, the IRS, state taxing authorities, and tax software companies have put in place many improvements for detecting tax-related fraud and protecting taxpayers, but fraudsters are adapting faster. Some identity thieves are even exploring off-shore opportunities to hack into various systems and profit from compromised identity information.

Because these crimes place a significant burden on the U.S. tax system and result in taxpayers losing confidence in the system as whole, IRS Commissioner John Koskinen saw the need to act quickly in preparation for next tax season. On March 19, he convened a Security Summit meeting in Washington, D.C. with IRS officials, chief executive officers of leading tax preparation firms, software developers, payroll and tax financial product processors, and state tax administrators to discuss common challenges and ways to leverage collective resources to stem the tide of tax refund fraud. A meeting of this type was unprecedented. There were approximately 25 attendees at the meeting and I represented Thomson Reuters.

Participants agreed to form a public-private partnership to work collectively to combat tax refund fraud. Three working groups were established from the Summit, with members from the IRS, states, and industry co-chairing and serving on each group.

The Authentication working group was tasked with identifying opportunities for strengthening authentication practices, including identifying new ways to validate taxpayers and tax return information, and new techniques for detecting and preventing tax refund fraud.
The Information Sharing working group agreed to work on identifying opportunities for sharing information that would improve collective capabilities for detecting and preventing refund fraud.
The Strategic Threat Assessment and Response working group was tasked with looking long-term to enable the development of proactive initiatives and solutions to combat refund fraud.

Over the course of two months, we collaborated to identify new safeguards and security measures to prevent tax-related identity theft, ultimately agreeing that a multi-layered and coordinated approach was necessary to combat the ever-evolving methods thieves use to target taxpayers.

As we don’t want to provide identity thieves with insight into what the public-private group is doing specifically, I won’t go into detail here. I can, however, share an example: over 20 new data elements have been added to tax return information to provide additional capabilities for authenticating taxpayer and tax return information. Also, an information and sharing assessment center will likely be set up, operating much like those in aviation and financial services. This will allow for the free flow of information among the public-private members of the working group.

Outside of the public-private working group, there are additional steps that the IRS is focused on to assist in combating tax refund fraud. Some of the more concrete ideas for security measures include the possibility of delaying refunds or speeding up W-2 reporting. As it stands, the IRS typically doesn’t receive employers’ wage information until late spring, which is much later than employees do. So, millions of refunds are distributed before the IRS can check the return’s wage information against the employer data. For this to happen, however, Congress would need to require earlier delivery of W-2 information to the IRS.

Another idea revolves around increasing the use of the IRS’ Identity Protection Personal Identification Number (IP PIN), possibly lowering the reliance on social security numbers as the sole taxpayer ID.