JOINT HEARING BEFORE THE COMMITTEE ON WAYS AND MEANS SUBCOMMITTEES ON OVERSIGHT AND SOCIAL SECURITY U.S. HOUSE OF REPRESENTATIVES:

“Identity Theft and Tax Fraud”

As we have reported previously, a substantial number of individuals continue to submit tax returns reporting false income and/or withholding for the sole purpose of receiving a fraudulent tax refund.  Many of these claims involve identity theft.  For Processing Year 2011,2 the IRS reported that of the 2.2 million tax returns that it identified as fraudulent, approximately 940,000 tax returns with $6.5 billion in associated fraudulent tax refunds involved identity theft.

At the beginning of the 2012 Filing Season, the IRS announced the results of a nationwide sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft.  This effort is part of the IRS’s identity theft strategy to prevent, detect, and resolve identity theft cases.  In addition to this crackdown by its law-enforcement division, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued.  These efforts include designing new identity theft screening filters that the IRS believes will improve its ability to identify false tax returns before they are processed and before any fraudulent tax refunds are issued.

Tax returns identified by these new filters are held during processing until the IRS can verify the taxpayers’ identity.  IRS employees attempt to contact these individuals and request information to verify that the individual filing the tax return is the legitimate taxpayer.  Once a taxpayer’s identity has been confirmed, the tax return is released for processing and the tax refund is issued.  If the IRS cannot confirm the filer’s identity, it halts processing of the tax return to prevent the issuance of a fraudulent tax refund.  As of April 19, 2012, the IRS reports that it has stopped the issuance of $1.3 billion in potentially fraudulent tax refunds as a result of the new identity theft filters.

Direct deposit, which now includes debit cards, is often used by identity thieves to obtain fraudulent tax refunds.  Approximately $4.5 billion of the $5.2 billion in potentially fraudulent tax refunds we identified were issued by direct deposit.   
 
In September 2008, we reported9 that the IRS was not in compliance with direct deposit regulations that require tax refunds to be deposited into an account only in the name of the individual listed on the tax return.10  We recommended that the IRS limit the number of tax refunds being sent to the same account.  While such a limitation does not ensure that all direct deposits are in the name of the taxpayer, it does help limit the potential for fraud.  The IRS was concerned about limiting the number of direct deposits to a single account because of situations in which an account is in the name of multiple individuals.  In addition, the IRS places responsibility for compliance with Federal direct deposit regulations on the taxpayer.  The IRS stated that it is the taxpayer’s responsibility to ensure that their tax refunds are only directly deposited into their accounts.  However, in our opinion, the IRS is responsible for ensuring that direct deposits are made to an account in the name of the recipient.  Representatives from the Financial Management Service also indicated that the IRS is responsible for enforcing the Code of Federal Regulations requirement.
 
To date, little has been done to ensure that tax refunds are directly deposited only into the taxpayer’s account.  Some bank accounts are obviously being used for the refunds of many different taxpayers.  For example, we found that 4,157 of the potentially fraudulent tax refunds we identified totaling $6.7 million were deposited into one of 10 bank accounts.  Each of these 10 bank accounts had direct deposits of more than 300 tax refunds.
 
The use of debit cards to receive tax refunds further increases the risk of tax fraud.  Identity thieves are using debit cards to fraudulently obtain direct deposits of fraudulent tax refunds.  For example, authorities confiscated over 5,000 debit cards during the investigation of a Tampa, Florida identity theft scheme.  Individuals can obtain a debit card online or from a bank, a third-party provider, or a local retailer.  This complicates the IRS’s efforts to identify the holder of the debit card as well as the bank account and the tax account associated with the debit card.  In addition, the debit card issuer is the only entity that can ensure the individual requesting the debit card and receiving the tax refund is the taxpayer.
 
The IRS has a process in place in which it works with banks to obtain information on questionable tax refunds.  In December 2011, one bank associated with the confiscated debit cards from the Tampa scheme provided the IRS with a listing of 60,000 bank accounts, including debit card accounts, that it had identified nationwide with questionable tax refunds.  The bank intercepted and prevented questionable tax refunds totaling $164 million from being deposited into these accounts.

The Treasury Offset Program is a centralized offset program, administered by the Financial Management Service's (FMS) Debt Management Services (DMS), to collect delinquent debts owed to federal agencies and states (including past-due child support), in accordance with 26 U.S.C. � 6402(d) (collection of debts owed to federal agencies), 31 U.S.C. � 3720A (reduction of tax refund by amount of the debts), and other applicable laws. FMS disburses federal payments, such as federal tax refunds, for agencies making federal payments (known as "payment agencies"), such as the Internal Revenue Service. "Creditor agencies," such as the Department of Education, submit delinquent debts to FMS for collection and inclusion in TOP and certify that such debts qualify for collection by offset.

If you have questions regarding the offset of your federal tax refund or offset of another U.S. government-issued payment, you may phone the Treasury Offset Program Call Center at 1-800-304-3107.  

For additional information regarding the FMS Debt Management Services, you may visit the official FMS website at:  www.fms.treas.gov/debt or by phoning their office at 1-888-826-3127.   For questions or concerns you may have regarding the details of the debt itself, you may wish to directly contact the department or agency from which your debt originated.