Two years after WTHR exposed the Internal Revenue Service ignoring millions of cases of identity theft, the federal agency’s own inspector general says the problem is even larger than expected – and the IRS is unwilling to take steps to protect hundreds of thousands of victims.

Washington, D.C. (WTHR) - Two years after WTHR exposed the Internal Revenue Service ignoring millions of cases of identity theft, the federal agency’s own inspector general says the problem is even larger than expected – and the IRS is unwilling to take steps to protect hundreds of thousands of victims.

Following the Eyewitness News investigation, the U.S. Treasury’s Inspector General for Tax Administration (TIGTA) reviewed millions of tax returns filed by undocumented workers in 2015. The inspector general released a formal audit report this summer showing those tax returns include an estimated 1.5 million cases of identity theft. (That’s for a single year reviewed.)

After WTHR’s reporting, the IRS pledged to better identify victims, to place a warning on their accounts and to notify them of suspected identity theft. But the TIGTA audit reveals that did not happen in hundreds of thousands of cases.

According to the inspector general’s review, more than 830,000 victims were not identified even though identity thieves electronically filed tax returns with evidence that they used the victims’ Social Security Numbers to gain employment. Despite the IRS’s promise to notify victims, that never occurred – much to the disappointment of the inspector general. The audit says:

“In its justification to not take actions to notify victims, the IRS stated that there is no action the SSN owner or the IRS can take to prevent the SSN from being misused. We disagree. In fact, the notice the IRS sends to victims of employment identity theft outlines actions these individuals can take to protect themselves. For example, the notice states that ‘the IRS became aware that your SSN was used by another person for obtaining employment, and we wanted to inform you so that you could take proactive actions to prevent further misuse of your SSN and other personal information.’ These individuals will continue to be victimized without their knowledge or ability to take proactive actions to protect themselves.”

TIGTA made seven recommendations for the IRS to correct the problems it identified and to better protect taxpayers from identity theft. The IRS disagreed with five of those suggestions. “As a result, actions are not being taken to assist 548,968 victims of employment identity theft,” said the inspector general’s office.

How the identity theft happens

TIGTA identified millions of tax returns filed by undocumented workers that include an identification number mismatch. Those tax returns were filed using both an individual tax identification number (ITIN) assigned by the IRS for an undocumented worker and a valid Social Security number that belongs to someone else. Undocumented workers can use an ITIN to report income, but that number cannot be used to legally gain employment in the United States. For that reason, millions of undocumented workers secretly obtain a Social Security number that belongs to someone else so they can get a job. The IRS allows (and even encourages) undocumented workers to include both of those numbers on their tax returns -- even though it shows clear evidence of identity theft. WTHR exposed how the IRS instructs its workers to ignore the crime and to process the tax returns anyway.

“We are not supposed to do anything. Just let it go,” an IRS whistleblower told WTHR in 2015.

“It’s wrong. Just plain wrong. It’s stealing, but we cannot do anything about it,” another whistleblower added, explaining how IRS managers threatened to take disciplinary action if she refused to process tax returns from undocumented workers that showed signs of identity theft.

Millions of victims across the country never knew their identities were stolen until the IRS contacted them to allege they had filed fraudulent tax returns. The IRS falsely accused Dave Burian and Alfred Allen of cheating on their taxes after undocumented workers used the Hoosiers’ Social Security numbers to get jobs and earn income. It tool Allen several years to resolve the discrepancy with the IRS, and because the IRS claimed he had not properly paid his taxes, Allen lost health insurance for his children during the process.

“I had to go months hoping my kids wouldn't get hurt because they didn't have the insurance,” he told WTHR. “It’s just not right. I don’t know how they can allow that to happen.”

The IRS kept its internal policy a secret for years, and its policy manual referred to undocumented workers who stole someone else’s Social Security numbers to get a job as “borrowers.” An anonymous IRS employee provided a copy of that policy to 13 Investigates, helping to expose a secret that even senior lawmakers in Washington had never heard of.

“I'm outraged. Anybody's Social Security number is personal to that person. This is one of the biggest pieces of abuse that I've come across,” said then-Congressman Dan Coates (R – Indiana) after watching WTHR’s report. “This is an outrage and it needs to be addressed.”

IRS promise not kept

Bowing to pressure by Congress, the IRS said it would start warning taxpayers when their Social Security numbers are stolen. But the agency is now backtracking on that promise after learning the problem is much bigger than expected. The recent TIGTA report suggests there are systemic problems throughout the IRS that prevent the agency from even identifying victims of identity theft – let alone contact them to warn them about the problem.

“It should be noted that IRS employees responsible for processing paper tax returns could have identified the ITIN/SSN mismatch…” said the audit report. “However, internal guidelines instruct them to disregard this mismatch and continue processing the tax returns. IRS management indicated that any changes to paper tax return processing guidelines to identify ITIN/SSN mismatches would require changes to the entire paper return processing procedures. This would also incur additional costs and resources, which are not available due to budget constraints.”

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More than a quarter million of the employment-related identity theft cases identified by the IRS on 2015 tax returns involve children, who do not even have active tax accounts with the IRS. The IRS told the inspector general’s office it has no protocol for contacting those victims.

“The IRS has not developed a process to notify the parents or legal guardians that an identity thief used their dependent’s Social Security number to gain employment,” the audit report revealed.

The IRS is supposed to flag tax returns with ITIN/SSN mismatches so taxpayers are offered a special PIN number to more securely file their future tax returns. The IRS confirmed that information for 13 Investigates following WTHR’s 2015 investigation. But the agency is now telling a different story. According to a response provided to TIGTA:

“IRS management further informed us that IRS programming does not place the marker on all victims’ tax accounts. Management stated that the programming to identify ITIN/SSN mismatches on e-filed returns was originally designed so that the IRS could identify the potential scope of the issue by identifying ITIN/SSN mismatches and counting the number of employment identity theft occurrences. This was done to evaluate the potential for notifying taxpayers to allow them to protect their personal information. The original programming was not intended to identify or protect individual victims. In addition, management indicated that they have not reviewed the programming or expanded the purpose of the employment identity theft marker since the programming was implemented in January 2011.”

TIGTA says each year the IRS receives approximately 2.4 million tax returns from undocumented workers who report wages. While that income provides valuable tax revenue to the U.S. Treasury, TIGTA says it often comes at the expense of millions of unsuspecting victims faced with stolen Social Security numbers and identity theft. TIGTA considers employment-related identity theft an ongoing significant problem facing the IRS.