E-filing and ID theft aren't linked, IRS says

The growing popularity of the Internal Revenue Service's e-filing system isn't to blame for a massive increase in identity theft-related tax fraud, IRS Commissioner Douglas Shulman told a House panel Thursday.

E-filers are required to submit all the same identifying information as paper filers, Shulman told the House Oversight and Government Reform Committee's panel on financial management.

Asked if paper filing isn't harder to fake because it requires physical forms, such as the W2, Shulman noted filers can get around the requirement by claiming to have lost paper forms. Identity thieves who want to keep their contact with the IRS at a minimum can receive refunds just as quickly as e-filers by submitting paper returns by overnight mail, he said.

The number of Americans who file their taxes electronically has grown significantly in each of the past several years, topping off at 71 percent of all returns during the 2010 tax season. Meanwhile, the number of tax-related identity theft incidents has increased fivefold, from about 50,000 in 2008 to nearly 250,000 in 2010, when 140 million returns were filed.

Jim White, who directed a Government Accountability Office review of identity theft-related tax fraud, agreed there's no evidence the increase in tax-related identity theft in recent years is a result of breaches in IRS' physical or online security.

Still, learning more about the proportion of identity thieves who e-file fraudulent returns or who request that refunds be paid out to debit cards rather than in paper checks or direct deposits to checking accounts could help the agency improve its fraud detection procedures, he said.

Subcommittee chairman Rep. Todd Platts, R-Pa., agreed, asking Shulman to bring the committee more specific data about how and when most fraudulent filers submit returns.

The most common way identity thieves profit from the IRS is refund fraud, in which a thief uses a taxpayers' name, Social Security number and other identifying information to file a false return and collect the refund.

In other cases, an identity thief who doesn't want to apply for a job with his own record will provide someone else's name and information -- so-called employment fraud -- confusing the IRS when the employer submits the fraudster's tax information, according to the GAO report.

Shulman stressed that there are no known cases of identity thieves stealing taxpayers' information while it is in the agency's hands, although people may first learn their identity has been stolen when the IRS tells them they've submitted two returns.

In response to the growth in tax-related identity theft, the IRS has instituted a series of automatic triggers, such as a major change in income, that raise the level of scrutiny a return gets.

When identity-fraud triggers were first instituted a few years ago, roughly 80 percent of the returns marked for additional inspection turned out to be legitimate, Shulman told the panelists. This year, about 75 percent of the returns turned out to be fraudulent, evidence that the system is being refined appropriately, he said.

Returns from past victims of tax-related identity theft automatically undergo additional inspection, he said. This year the agency is running a pilot program offering Social Security number-linked personal identification numbers to previous victims. If those victims' tax forms are turned in without their PINs, they won't be processed, he said.

Also testifying at Thursday's hearing were three victims of tax-related identity theft who said they felt doubly victimized by an insensitive, confusing and bureaucratic response from IRS staff.

Shulman apologized to the victims and said he not only doubled the number of IRS staff devoted to handling identity theft claims but also would review training for all public service staff.

He said the IRS had cut staff in those positions as part of agencywide belt-tightening during the recession.

"Frankly, we just didn't know there was going to be this explosive growth [in tax-related identity theft cases] and there were budget issues and potential shutdowns," Shulman said. "So we're trying to balance resources as we go."

The subcommittee hearing was delayed nearly an hour by a full Oversight Committee hearing on the 2010 Deepwater oil spill that ran long and then was interrupted several times by floor votes. By the time witnesses began to testify, only Platts and ranking member Rep. Edolphus Towns, D-N.Y., were in attendance. Subcommittee Democrats other than Towns decamped to a Democratic caucus meeting with President Obama in the White House.