New Plans for Next Tax Season to Address Tax-Related Identity Theft

Members of the Security Summit say their efforts are being rewarded with a marked improvement in the battle against identity theft and tax fraud. The group – made up of tax industry partners and state tax agencies who work with the Internal Revenue Service – helped the IRS develop new strategies that have borne fruit in 2016.

“It is gratifying to see how many different ways we have already identified and begun to implement changes,” said Dawn Cash, President of the Board of Trustees of the Federation of Tax Administrators. “Taxpayers in states across the country are benefiting from this important work.” Cash is also a commissioner on the Oklahoma Tax Commission.

Security Summit members recently held a news conference in Washington, D.C to discuss the success their efforts have had – and to unveil new efforts for 2017.

IRS statistics show the Security Summit produced measures that helped prevent fraudulent returns from even entering the tax processing system, resulting in fewer bad returns, fewer bad refunds and fewer identity theft victims. Some of the tangible results included:

• Identity theft affidavits fell sharply. The number of people who filed affidavits with the IRS saying they were victims of identity theft dropped 50 percent during the first nine months of this year compared to 2015.
• More fraudulent returns stopped before processing. IRS statistics show a nearly 50 percent drop in the number of fraudulent returns that made it into the IRS tax processing systems– another sign the Summit efforts are working up front in the tax process. Through September of this year, the IRS stopped 787,000 confirmed identity theft returns, totaling more than $4 billion. For the same nine-month period in 2015, the IRS stopped 1.2 million confirmed identity theft returns, totaling about $7.2 billion.
• Fraudulent refunds fell. The number of bank partners grew to 620 institutions from 514 institutions in 2015, enabling internal processes to continue improving. The number of suspect refunds stopped by banks and returned to the IRS dropped by more than 50 percent, to 108,539 in 2016 compared to 243,361 in 2015, showing an improved ability to stop fraudulent returns before refunds are paid.
• Shared information stopped more bad returns. Industry and state partners provided information that helped improve IRS fraud filters and stop additional bad tax returns, including 57,000 that would have bypassed IRS processing filters without Summit assistance.
• Shared data elements helped identify new areas. Several new data elements shared on tax returns from Summit partners helped the IRS stop over 74,000 suspicious returns, representing over $372 million in refunds that were prevented from being paid.

Despite the positive results, however, Security Summit members and the IRS agree that much more remains to be done in 2017. Some of the work won’t be apparent to taxpayers – but will ensure the safety of them and their information:

• Data elements – information that is transmitted in the background along with each e-filed income tax return – have been updated and expanded. Some 37 new data elements have been added for 2017 to strengthen the authentication of the tax return.
• The income tax industry will share 32 data elements from business tax returns with the IRS and states. This will extend more identity theft protections to business filers.
• More than 20 states are working with the financial services industry to create their own version of a program that allows the industry to flag suspicious refunds before they can be deposited.
• The Form W-2 Verification Code project started by the IRS last year will expand in 2017 to be used on 50 million forms. The process uses a 16-digit verification code that comes from the employer that must be entered in the return in order to validate the information on the form comes from a real employer.
• Software password requirements will continue to be tightened by the tax software industry, providing additional safety before a return can be filed.

Taken as a whole, these measures can help build a picture of a “trusted customer” that helps the IRS and states do a better job of spotting fraudulent returns and protecting taxpayers.

This overall anti-fraud effort has shown that information, shared quickly with the partners who need it, is one of the big keys to success. To that end, Summit partners will launch a new center that aims to do just that. The Identity Theft Tax Refund Fraud Information Sharing and Analysis Center (ISAC) is planned for 2017. It will serve as an early warning system, identifying identity theft schemes, then quickly sharing the information among Summit partners so they can react with safeguards in real time.

The Summit partners see ISAC as providing a threat assessment capability and an early warning about emerging problems while providing better data to law enforcement so they can investigate and prosecute identity thieves. Because the Center will be able to move quickly if a threat is found, those in the income tax industry and the public can be alerted in enough time to counter the threat.