Could the Internet Have Prevented $5.2 Billion From Going to IRS Refund Thieves?

The Internal Revenue Service estimates it has paid identity thieves $5.2 billion this year, in a situation where counterintuitively, online transactions might have reduced fraud.

According to auditors, crooks were able to claim tax refunds using stolen taxpayer ID information before the tax agency had time to verify their returns against mailed-in employer wage forms.

To detect fraud, the IRS needs data from employers and the Social Security Administration earlier in the tax season -- a workflow problem that can be alleviated by requiring employers to file in January and to do so electronically. Today, electronic employer W-2 forms are due by March 31 and paper W-2 forms are due by Feb. 29.

"Most taxpayers entitled to a refund, along with many identity thieves attempting refund fraud, file early in the filing season — many in February," a Government Accountability Office report released Monday stated. “During return processing, IRS performs some compliance checks and issues refunds, but at this time it cannot verify the W-2 information for all returns (paper W-2s can be forged and fictitious wage information can be entered on a tax return)."

Currently, only employers filing large amounts of W-2 forms -- more than 250 -- must e-file. GAO recommended lowering that threshold to require employers with at least 5 to 10 forms also e-file.

"Having more e-filed W-2s would speed processing time for SSA (as compared to paper W-2 processing time) and would enable IRS to receive a larger percentage of W-2 data earlier," the report states. 

The Treasury Department has proposed changing the deadline for all W-2 forms to Jan. 31.

Just one minor obstacle: The gridlocked Congress would have to change the law requiring more employers e-file. 

Some Republicans lay much of the responsibility for hemorrhaging money on the IRS.

“The American people should be able to trust the IRS to protect their identities, preserve their privacy and ensure their hard-earned money isn’t being carelessly flushed down the drain," Senate Finance Committee Ranking Member Sen. Orrin Hatch, R-Utah, said in a statement. "Sadly, that’s not the case. I hope the IRS will take a serious look at these recommendations and work with Congress to implement smart safeguards.”
Key Democrats seem open to passing reforms to implement the recommendations. 
“This problem isn’t going away, unless we go hard after these criminals while also doing what we can to prevent this crime," Sen. Bill Nelson, D-Fl., said in a statement. "The time has come for Congress to act.”
Finance Committee Chairman Ron Wyden, D-Ore., pledged he would work with other lawmakers and the IRS "to fight this serious and growing problem.” 

(Image via Ievgenia Tkach/Shutterstock.com)