IRS detecting and stopping more ID theft on tax returns

The Internal Revenue Service has deployed more filters to catch a growing number of tax returns filed by identity thieves, but fraudsters are continuing to collect millions of dollars despite those efforts.

An interim filing season report released Monday by the Treasury Inspector General for Tax Administration found the IRS is continuing to increase the number of fraudulent tax returns detected and stopped from entering the tax processing system by rejecting e-filed tax returns and preventing paper tax returns from posting. 

As of Feb. 25, 2023, the IRS reported identifying 31,079 tax returns with approximately $310.7 million claimed in fraudulent refunds and prevented issuance of $303.7 million (97.7%) of those refunds. That amounts to a significant decrease in the amount of fraudulent refunds stopped compared to the same period last filing season, when $817.4 million in fraudulent refunds were identified and $807.9 million in fraudulent refunds were stopped.

However, the report offered a caveat. IRS officials told TIGTA the number of fraudulent refunds for processing year 2022 was higher than normal as those figures include approximately 44,000 tax returns that were identified in processing year 2021 but not worked on until processing year 2022. The figures in the comparable period in 2021 were far lower, with $15.96 million in fraudulent refunds identified and $12.6 million in fraudulent refunds stopped as of Feb. 25, 2021.

For the 2023 filing season, the IRS is employing 236 filters to identify potential ID theft tax returns and prevent the issuance of fraudulent refunds. In comparison, the IRS used 168 filters during the 2022 filing season. The filters incorporate criteria based on characteristics of confirmed ID tax returns, including amounts claimed for income and withholding, filing requirements, prisoner status, taxpayer age, and filing history. Tax returns identified by these filters are held during processing until the IRS can verify the taxpayer’s identity. If their identity can’t be confirmed, the IRS removes the tax return from processing to prevent the issuance of a fraudulent refund. 

As of March 2, 2023, the IRS reported it identified nearly 1.1 million tax returns with refunds totaling approximately $6.3 billion for additional review as a result of the identity theft filters. As of that same date, the IRS had confirmed 12,617 tax returns as fraudulent and prevented issuance of $105.3 million in fraudulent refunds. 

The IRS’s stepped up efforts include stopping fraudulent tax returns from being filed on behalf of deceased people and prisoners. As of Jan. 20, 2023, the IRS has locked taxpayer accounts of 52.5 million dead people, compared to 49.1 million accounts locked as of Dec. 31, 2021. When tax accounts are locked, e-filed tax returns are rejected and paper tax returns are prevented from posting to the IRS Master File. According to the IRS, as of Feb. 28, 2023, the agency had rejected 84,401 fraudulent e-filed tax returns and had stopped 564 paper tax returns from posting to the Master File as a result of the deceased taxpayer account locks. 

To combat refund fraud associated with tax returns filed using prisoners’ Social Security numbers, the IRS compiles a list of prisoners from the Federal Bureau of Prisons and State Departments of Corrections along with data from the Social Security Administration’s Prisoner Update Processing System. The data is used to identify for extra screening of tax returns filed using a prisoner SSN. As of Feb. 25, 2023, the IRS reported identifying for additional screening 14,939 potentially fraudulent tax returns filed by prisoners, but that actually represented a decrease of 55.5% over the number of tax returns identified during the same period of the 2022 filing season. 

The IRS automatically issues an Identity Protection Personal Identification Number to confirmed identity theft victims if their case is resolved prior to the start of the next filing season. Taxpayers nationwide can also request an IP PIN directly from the IRS if they’re concerned their personal information has been stolen and want to protect their identity when filing a tax return. The IP PIN is known only to the taxpayer and the IRS and acts as an authentication number to validate the correct owner of the Social Security Number or Individual Taxpayer Identification Number listed on that tax return. The IRS reported issuing 802,449 IP PINs to taxpayers as of March 4, 2023.