Crime in this case is paying lots of scammers. Based on preliminary analysis, the Internal Revenue Service (IRS) estimates it paid $5.2 billion in fraudulent identity theft refunds in filing season 2013 while preventing an additional $24.2 billion (based on what it could detect).

As a result the IRS needs to implement changes in a system that apparently leaks like a sieve and such changes could impact legitimate taxpayers by delaying refunds, extending tax season and likely adding costs to the IRS.

Watchdogs at the Government Accountability Office this week issued a report that looked at the IRS identity theft problem and make a few recommendations on how to fight the massive fraud that is taking place right now.

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The first and possibly most effective solution is to stop the IRS practice of what the GAO called “looking back” which matches returns with W-2 information after tax forms are filed.

“IRS currently cannot do such matching because employers' wage data (from Form W-2s) are not available until months after IRS issues most refunds. Consequently, IRS begins matching employer-reported W-2 data to tax returns in July, following the tax season. If IRS had access to W-2 data earlier—through accelerated W-2 deadlines and increased electronic filing of W-2s—it could conduct pre-refund matching and identify discrepancies to prevent the issuance of billions in fraudulent refunds,” the GAO stated.

For example, in 2012, the IRS received more than148.3 million tax returns and issued more than $309.6 billion in refunds to110.5 million taxpayers. By March 1, 2012 IRS had issued about 50% of all 2012 refunds, but did not have access to most of the 2012 W-2 data verified by the Social Security Administration.

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According to the GAO, in 2014, the Department of the Treasury proposed that Congress accelerate W-2 deadlines to January 31. “However, IRS has not fully assessed the impacts of this proposal. Without this assessment, Congress does not have the information needed to deliberate the merits of such a significant change to W-2 deadlines or the use of pre-refund W-2 matching,” the GAO stated.

Another fix the GAO proposes is requiring smaller companies to electronically file W-2s. Currently, employers who file 250 or more W-2s annually must e-file those forms. The IRS is generally prohibited from requiring those filing fewer than 250 returns annually to e-file. The Social Security Administration (SSA) estimated that to meaningfully increase W-2 e-filing, the threshold would have to be lowered to include those companies filing 5 to 10 W-2s, the GAO stated.

In addition, SSA estimated an administrative cost savings of about $0.50 per e-filed W-2.

Part of the overall issue is that the IRS is under pressure to issue refunds quickly. The IRS is required by law to pay interest if it takes longer than 45 days after the due date of the return to issue a refund.

The IRS tells taxpayers to anticipate their refunds generally within 21 days after filing and actively tries to meet this target. For tax year 2013, IRS reported that for tax returns filed through early March, taxpayers received refunds an average of 9.6 days after filing, the GAO stated.

Delaying those refunds is likely to burden taxpayers, according to IRS,

Taxpayers who file early and who are financially dependent

on a refund, such as low-income taxpayers receiving refundable credits,

could be hurt.

For example, according to the National Taxpayer Advocate, delayed refunds would have a detrimental effect on low-income taxpayers who use their tax refunds to pay winter utility bills.

According to the GAO analysis, the changes would also result in a permanent shift in the annual cycle of refunds on which some taxpayers depend. Once the change is made, the time interval between annual refunds will be the

same length as it is now; however given the billions in dollars of successful IDT refund fraud, IRS must strive to stay one or more steps ahead of identity thieves, or the risk of issuing fraudulent IDT refunds could grow. Staying ahead of identity thieves will require a significant resource investment from IRS as it strengthens and develops new tools, the GAO stated.

For its part the IRS neither agreed nor disagreed with GAO's recommendations, and it stated it is determining how these potential corrective actions align with available resources and IRS priorities.

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