June 13th, 2011

The Internal Revenue Service is expanding its ability to flag identity theft used to file fraudulent tax returns or employment forms and is moving toward a forward-looking approach to the problem, an agency official said June 9 at an annual software developer conference.

Following IRS Commissioner Douglas Shulman’s remarks at the National Press Club in April, IRS is trying to incorporate an approach that would tackle identity theft up-front, said David Knight, manager for the Pre-Refund Program Office for Earned Income Tax Credits. IRS hopes to get information from third parties before individuals file tax returns so that it can reject forms with information that does not match, he said. The service has been working to find ways to combat and flag fraud.

“Although we are able to detect large volumes of this fraud, there is a significant amount that we don’t know about,” he said.

In 2010, identity theft overtook credit card fraud as the most common form of fraud, Knight said, based on information from the Federal Trade Commission. That year there were more than 470,000 incidents of identity theft for tax fraud that affected more than 350,000 taxpayers, he said. This kind of fraud does not just hurt taxpayers, but also triggers a loss for the government.

IRS Launches New Programs, Units

IRS has started the Pre-Refund Program Office to stop fraudulent returns from going out, the Office of Privacy, Information Protection and Data Security, and the Taxpayer Assurance Program, he said. The service is also concerned with victim assistance and created the Identity Protection Specialized Unit as the central unit to handle identity theft victims.

The agency also has begun to work with prisons after it discovered a large number of the frauds were originating from the prison system. IRS hopes to have disciplinary hearings for prisoners who steal identities to file such returns, Knight said.

Criminal investigation is the lead on fraud, but it finds more fraud than it can pursue. IRS is also working with the Department of Justice to prosecute these cases, he said. About 95 percent of the cases prosecuted sent thieves to prison, Knight said.