tax news, security — May 23, 2014

Fixing the System

by Bob Williams

Fixing the System

In our last visit, we heard how fraudsters and other criminals are taking advantage of the U.S. income tax system to reap billions in ill-gotten gains – often at the expense of regular, law-abiding taxpayers.

How could this happen?

Simple: The IRS follows a mandate from Congress to pay out refunds as soon after receiving the return as possible. And while this may sound fine on the surface, it carries the seeds of crime along with it.

Sounds like efficient service, doesn’t it? Well, yes – and no.

Yes, because everybody likes getting their refund just a little bit faster. But No, because the bad guys know this as well. And they file bogus returns just as soon as the income tax filing season starts, hoping to get a jump – and a refund – before the real taxpayer has a chance to think about filing.

Hard Habits to Break

As taxpayers, we’ve gotten pretty used to getting our income tax refund within a few weeks – or even a few days – of our return being accepted. But if we want to stop the feeding frenzy of fraud that’s going on now, some very basic changes have to be made.

Writer Michael Kranish spoke to former Internal Revenue Service Commissioner Lawrence Gibbs for the Boston Globe article, IRS Overwhelmed by Identity Theft Fraud, to get his thoughts on the speedy-refund issue.

“When the IRS gets a return that claims a refund, the IRS does not have the ability to check that the taxpayer is titled to the refund, that it’s a real person,” Gibbs told the Globe. “They don’t have records to say whether the person claiming the refund is entitled to it. They just send the check.”

The bad guys, Gibbs says, just took advantage of the IRS’ itchy trigger finger, and the rest is, as they say, history.

Sanity – But At a Cost

A number of people have suggested strategies to income tax fraud juggernaut. Hopefully, someone will listen.

One group very concerned about the current trend is called CERCA, for Council for Electronic Revenue Communication Enhancement. CERCA, launched in 1994, was founded at the direct request of the Internal Revenue Service in order to provide a forum and a liaison point between the IRS and industry as well as other key stakeholders.

We had only to go down the hall to learn how the income tax industry views the issue. Our analysis manager, Michael Jenkins, is on the national CERCA committee. And while his opinions are his own, Michael has the benefit of exchanging views with fellow CERCA industry leaders.

“The group is very concerned about the rise of fraud and ID theft,” Jenkins said. “The IRS is very clear when it comes to the extent to which we can “control” fraud from both our professional and self-preparation products.”

The IRS has asked tax preparation companies like to pass along circumstances where they believe tax fraud exists. In the end, though, it’s the IRS that is tasked with determining whether tax returns are fraudulent. The industry can blow the whistle, but the IRS has to be the traffic cop.

Current thought in the income tax ranks puts forward suggestions for combating identity theft for tax fraud using two basic strategies: Technology-based solutions or common-sense measures.

“I believe the approach will initially be a mixture of both, with the common-sense weighing a little heavier in the balance,” Jenkins said. “Someone will need to continually monitor fraud from a human perspective and continue to make filters and fraud detection systems smarter as we learn fraud behaviors and patterns.”

Jenkins says he’d like to see an increase in the use of the IRS’ Identity Protection Personal Identification Number (IP PIN). That unique number is currently issued by the IRS to taxpayers who have suffered identity theft. Just over a million taxpayers were issued an IP PIN so far this tax season.

Jenkins says another way to head off fraud is to get the taxpayer involved directly.

“The IRS is in the process of creating a “home” for every U.S. taxpayer on the site. This will allow for every taxpayer to create an account to have access to, and maintain their personal information with the IRS. I believe providing a place for taxpayers to keep their records updated and accurate on an annual basis will hopefully strengthen the validity of the information associated with Social Security Administration information and tax return information.”

The current commissioner of the IRS, John Koskinen, told the Boston Globe he’d like to see returns checked up front with financial information – such as W-2s or 1099s – to ensure their authenticity. Sounds simple enough.

But consider that a change like that might take years to implement, and would very likely require an IRS increase in funding at a time when those in Congress want to cut IRS funding instead of increasing it, and you see the simple change isn’t so simple anymore.

In a similar vein, Congress could approve a recommendation from the office of the National Taxpayer Advocate to create the system Koskinen mentioned, where income tax returns would be matched with third-party financial information like W-2s before they’re deemed ready to send out refunds.

At present, the IRS doesn’t get the information on W-2s or interest and dividends for weeks or months – long after the refund’s been issued.

To implement such a common sense system, the American taxpayer will have to learn to wait on his refund. Would the populace stand for such outrage in the name of security? Only time will tell.

One thing’s for sure, though. The longer we go without such measures in place, the farther ahead of us the fraudsters will be.

It’s time mere convenience takes a back seat to collective security.

Once again, our thanks to Michael Kranish and the Boston Globe for the use of Michael’s article, IRS Overwhelmed by Identity Theft Fraud. And our thanks to Michael Jenkins for his insights.

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