Knowledge and Insights

Focus On Costs Of Identity Theft-Related Tax Refund Fraud

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National Taxpayer Advocate Nina E. Olson recently released her statutorily mandated mid-year report to Congress that identifies the priority issues the Taxpayer Advocate Service (TAS) will address during the upcoming fiscal year, including tax-related identity theft.

The report notes that in recent years, taxpayers and the IRS have been victimized by identity thieves who use stolen identity information to file fraudulent returns to try to obtain refunds

There are two circumstances under which taxpayers may be affected.

  • First, if an identity thief has filed a false return on which the IRS has paid a refund, the IRS will automatically freeze the return later filed by the legitimate taxpayer. A recent TAS study showed that the IRS takes about six months to resolve these cases and pay out the legitimate taxpayer’s refund. In each of calendar years 2013 and 2014, the IRS received about 730,000 identity theft cases with taxpayer impact; and over the last three fiscal years, TAS has received an average of about 52,000 identity theft cases a year.
  • Second, the IRS runs most returns claiming a refund through certain filters to identify suspicious returns. When it identifies a return as suspicious, the IRS suspends the processing of the return and issues a notice requiring the taxpayer to authenticate his or her identity. During the 2015 filing season, the IRS’s Taxpayer Protection Program (TPP) filters stopped more than twice as many questionable returns as in the prior year. About one-third of the returns stopped by the TPP turned out to come from legitimate filers; and, at least for the largest segment of the TPP inventory, this false positive rate is up substantially from the 2014 filing season.

During the filing season alone, the IRS received about 1.6 million taxpayer calls on its Identity Protection Specialized Unit (IPSU) telephone line. The level of service was about 54 percent and the average hold time was about 25 minutes. It also received about 2.9 million taxpayer calls on its TPP telephone line. As noted above, the level of service was 17 percent for the TPP line; and the average hold time was about 28 minutes.

The report expresses concern that the IRS is not doing enough to assist identity theft victims and reiterates the National Taxpayer Advocate’s longstanding recommendation that the IRS assign a single employee to coordinate complex identity theft cases. “Equally important, no one employee is held accountable for the resolution of the case. Thus, affected taxpayers often feel like they are victimized a second time by the IRS’s processes,” the report says.

The report says a primary focus for TAS during the upcoming year will be to recommend, from the victim’s perspective, improvements and alternative approaches to reduce the time it takes to achieve complete and accurate resolution of identity theft cases.

To learn more about taxpayer identity theft and prevention, contact me at or 609-689-9700.