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IRS Enacts Safeguards to Further Curb Tax Refund Fraud

Posted by IRS on Thu, Oct 26, 2017

IRS Enacts Safeguards to Further Curb Tax Refund FraudThe IRS is enacting additional safeguards for the 2018 tax filing season to help further curb refund fraud.

Working with state tax agencies and private-sector industry leaders, the IRS also reported fewer identity theft returns, fewer fraudulent refunds and fewer taxpayers who were victims of identity theft.

The effort – known as the Security Summit partnership – was created in March 2015. It has led to stronger federal and state tax systems including important new protections for taxpayers – which take on even greater importance given recent high-profile data breaches.

“We’ve seen the number of identity theft-related tax returns fall by about two-thirds since 2015. This dramatic decline helped prevent hundreds of thousands of taxpayers from facing the challenges of dealing with identity theft issues,” IRS Commissioner John Koskinen said in a press release. “But we have much more work facing us. As we evolve, so do the cybercriminals here and abroad. We must constantly be on guard.”

New Protections for Business Returns

Included in the 2018 safeguards is increased emphasis on identity theft protections for business returns in the Form 1120 and 1041 series. The IRS will be asking tax professionals to gather more information on their business clients. The data being collected assists the IRS in authenticating that the tax return being submitted is actually a legitimate return filing and not an identity theft return. Some of the new questions people may be asked to provide when filing their business, trust or estate client returns include:

  • The name and Social Security number of the company individual authorized to sign the business return. Is the person signing the return authorized to do so?
  • Payment history – Were estimated tax payments made? If yes, when were they made, how were they made, and how much was paid?
  • Parent company information – Is there a parent company? If yes, who?
  • Additional information based on deductions claimed.
  • Filing history – Has the business filed Form(s) 940, 941 or other business-related tax forms?

To help businesses and business return preparers, the IRS has created a new Identity Theft Guide for Business, Partnerships and Estate and Trusts.

READ MORE: IRS Warns Taxpayers of New Scam Involving Phony Certified Letters

Progress Against Identity Theft

Since 2015, the IRS has put in place numerous safeguards as the federal, state and private sectors worked together. For example, the tax industry shares dozens of important data points from returns that help the IRS and states identify potential identity theft fraud. Password protocols for both individual and tax professional software have been enhanced. States have worked with financial institutions to create their own program to help identify suspect refunds. The IRS continues to pilot a Form W-2 Verification Code that helps verify income information and employers.

Among the highlights seen by the IRS since 2015:

  • Confirmed identity theft returns declined. In calendar year 2016, the IRS stopped 883,000 confirmed identity theft returns, a 37 percent drop in confirmed identity theft returns from 2015. During the first eight months of 2017, the IRS has stopped 443,000 confirmed identity theft returns, a 30 percent decline from same time last year.
  • Financial firms stopped suspect refunds. Financial institutions stopped 124,000 suspect refunds in 2016, a 50 percent decline from 2015. Financial institutions have stopped 127,000 suspect refunds so far this year, which in part reflects a handful of cases involving several thousand accounts.
  • Identity theft victim numbers fell substantially. The number of people reporting that they were victims of identity theft fell to 376,000 in 2016, a 46 percent decline from 699,000 in 2015. This year the strong trend line has continued through August: 189,000 taxpayers have reported themselves as victims of identity theft, which is down approximately 40 percent from the same time last year.

The IRS and its Security Summit partners are already looking at how to refine existing protections and add new ones for the 2018 filing season. For example, Summit partners will be sharing more data points from tax returns than in the past.

Also for 2018, there will be a new “Verification Code” box included on all official Forms W-2 for the first time. Many taxpayers will see a 16-character code on about 66 million Forms W-2 to assist with authenticating the Form W-2. Taxpayers preparing their own returns and tax professionals are urged to enter the code if the box contains the 16-digit number.

Due to security concerns, not everything the partners do is visible to the public or fraudsters. For example, the Summit partners continue to implement information sharing in the Identity Theft Tax Refund Fraud Information Sharing and Analysis Center (ISAC) where emerging identity theft schemes and alerts are shared within the partnership. So far this year, 67 security alerts have already been shared through this process.

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This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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