it’s hard to tell.
by rick telberg
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the good news: identity theft is down.
special report – fixing the irs: irs #fails at online services spell problems for professionals | tax accountants fill the breach of a failing irs | beware the ez way out | can the irs improve its phone service? | when clients face ‘unreal’ irs audits | irs warns about private debt collectors for tax season 2018 | underfunded irs swamped with problems | irs in retreat from communities | military personnel face new battles at home: the irs | as new economy surges, irs falls further behind | is the irs winning the battle against identity theft? | irs mulls raising fees to cover budget shortfalls |
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the bad news: there’s a lot of identity theft.
apparently, the internal revenue service and tax practitioners have been doing something right to prevent identity theft. since 2015, cases observed by the irs have declined from 588,795 to 208,707 in 2017. that’s a 65 percent drop in two years. not bad!
but 208,707 is still a big number—way too many taxpayers who have seen their refunds disappear into cyberspace. in addition to that number, there is still a significant inventory of unresolved cases from years past.
nobody has accurate statistics on where taxpayer information, such as social security numbers, addresses, and employer etns got sucked up by hackers and face-to-face fraudsters. some of the leaks came from the poorly secured computers of tax practitioners, retailers, human resources departments, and home computers. sometimes the data were elicited from scam phone calls, other times from shady fly-by-night tax services.
it also isn’t quite clear what has caused the steep reversal in identity theft. the irs’s new centralized identity theft victim assistance (idtva) unit has helped. automated id theft filters have also helped, arguably a little too much.
it might also be the way the irs counts cases. cases being pursued by various irs units may not make their way into the final count. when the taxpayer advocacy service tallied up cases unresolved after 180 days, it found 178,000—substantially more than the 36,333 reported by the irs.
in many cases, the idtva assigns a specific agent to work with specific victims to minimize the possibility of continued problems—a laudable case of personal, human interaction with taxpayers, a principle that the irs would do well to apply elsewhere.
automated id theft filters, on the other hand, are cases of automation gone awry. as tax frauds are identified, the filters are adjusted and tightened up. trouble is, the tighter they get, the more often returns are flagged as possible frauds. in 2016, the filters were wrong 53 percent of the time. in 2017, as of september 30, the false detection rate was 62 percent. the irs blames several major data breaches in the private sector, but each false flag means a taxpayer inconvenienced, a refund delayed, and an irs agent chasing a wild goose.
the irs is getting better at detecting identity theft, but fraudsters are getting better at what they do. fraudulent business tax returns are the latest trend because they tend to get through the filters that are designed for individual taxpayers. likewise, underhanded tax preparers, entrusted with detailed taxpayer information, have an easy time bypassing filters.
given that hackers, thieves, and fraudsters all over the world have access to huge amounts of taxpayer information, the tas says the irs needs to fundamentally overhaul how it identifies individual taxpayers. the tas recommends some new kind of personal identification number. such a switch, however, would cost a lot of money, and money’s something the irs just ain’t got right now.
until the irs can perfect its anti-fraud efforts, tax practitioners and cpas will continue to be a crucial line of defense. clients need to know the dangers they face, the likelihood of their returns misidentified as fraudulent, and the measures they should take to protect themselves. they will also need professional assistance to undo the effects of false flags, fake returns, and misdirected refunds. and of course, practitioners have to take every precaution to protect their data. the irs is simply not able to cover for sloppy security.