Congress could make it easier for the IRS to identify and prevent fraudulent identity theft (IDT) refunds, according to a report released Monday by the Government Accountability Office.
IDT refund fraud occurs when an identity thief files a tax return using a legitimate taxpayer’s identity information in order to collect that person’s tax refund. For FY 2013, the IRS “estimates it paid $5.2 billion in fraudulent identity theft refunds…while preventing $24.2 billion (based on what it could detect).” (RELATED: 50,000 Inmates Claim Tax Refunds, Report No Wages)
The IRS “has reported a substantial increase in IDT refund fraud,” in recent years, and has taken steps to address the threat, for instance by doubling the number of employees working on such cases between 2011 and 2014. However, GAO says it remains unclear whether the reported increase reflects an overall increase in fraud, or merely improved detection by the IRS.
Some of the problem stems from the discrepancy between the deadlines for the IRS to issue refunds and for employers to submit W-2 information, which prevents the IRS from conducting “pre-refund matching” that would allow it to identify inconsistencies between the two. (RELATED: Tax Return Fraud Explodes in Tampa)
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Because “preventing fraudulent refunds is easier and more cost-effective than trying to recover them after they have been issued,” pre-refund matching offers significant advantages to both taxpayers and the government.
By law, the IRS is required to pay interest “if it takes longer than 45 days after the due date of the return to issue a refund.” On the other hand, “employers’ wage data are not available until months after IRS issues most refunds.”
One possible solution, suggested by the Treasury Department in March, is to move the deadline for employers to submit W-2 information from March 31 to January 31, which is already the deadline for sending W-2’s to employees.
However, GAO says that, “the costs and benefits [of that approach] have not been identified, estimated, or documented,” leaving Congress with insufficient information for deliberating the merits of the proposal. (RELATED: Obamacare Might Kill Your Tax Refund)
There is, for example, a risk that accelerated deadlines “could result in an increased number of corrected W-2’s filed.” Currently, less than 1 percent of W-2’s require correction, because employers have “a window of time to make corrections before they file.” Under an accelerated deadline, it is estimated that corrections could rise to over 6 percent.
Such risks could be mitigated to a certain extent, however, by lowering the threshold for e-filing of W-2 forms. At the moment, employers are only required to e-file if they are submitting 250 or more W-2 forms, but GAO suggests reducing this threshold to five or 10 returns.
Not only would having more e-filed W-2s speed processing time, it would also significantly reduce administrative costs. Based on 2013 data, “an e-filed W-2 costs about $0.002 to process, while a paper W-2 costs about $0.53 to transcribe and process.”
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