Identity thieves may be defrauding the Internal Revenue Service by much more than the nearly $6 billion the federal tax agency claims to have lost through holes in its security policy in 2013.
That’s because the IRS presented an unreliable estimate of how much it had lost to identity fraud — a rationale based on calculations with no supporting documentation — as a precise measure of its losses, according to a report by the Government Accountability Office.
The tools the IRS uses to prevent identity fraud from happening in the first place are also full of holes, the watchdog found. For example, the agency requires filers to use a personal identification number to file their taxes online.
But the accountability office discovered “identity thieves can easily find the information needed” to gain someone else’s number by searching public records, “allowing them to bypass some, if not all, of IRS’s current automatic checks.”
“IRS has poured resources into trying to clean up the tax accounts of the honest victims and is playing a losing game of ‘pay and chase’ with the thieves,” the accountability office said.
The watchdog recommended the IRS instead work “to prevent fraudulent refunds from being issued in the first place.”
IRS officials cited “resource constraints” in defense of why they didn’t conduct a more thorough analysis of how much money the agency could have lost to identity fraud.
But the accountability office suggested “better reporting of what is already known” from analyses “would not be costly.”
For example, disclosing the amount of uncertainty involved in quantifying identity fraud could diminish the “false sense of precision” in the agency’s estimated losses, which could lead to “different decisions about how to allocate resources to combat [identity theft] refund fraud.”
The watchdog questioned why agency officials reported their estimated losses as a precise number rather than a range, given the inherent guesswork in accounting for such fraud.
While the IRS relies on a system known as “Taxonomy” to estimate the amount of identity theft, the federal tax agency couldn’t provide an explanation for why it estimated fraud losses as it did.
IRS officials said they didn’t keep track of the rationale behind their methodology because they didn’t have the time or money to do so. Flaws in the Taxonomy system “result in overestimates in some categories and underestimates in others,” the accountability office said.
In May 2014, the IRS estimated it had lost $4.8 billion to identity theft. But after prodding from the watchdog office about factors the tax agency had neglected, IRS officials upped their estimate to $5.8 billion.
Although the tax agency claimed to have prevented identity thieves from stealing $24.2 billion through fraudulent refunds in 2013, the accountability office said the actual amount could be higher or lower.
“Honest” taxpayers who have been the victim of such theft can still prove their identities to the IRS and claim their refunds, but the tax agency may be forced to eat the payments it handed to criminals.
“Given the size and scope of [identity theft] refund fraud, additional bold and innovative steps are needed from Congress and IRS,” the watchdog warned in an August 2014 report on the same subject.
Go here to read the full Government Accountability Office report.
