Improved filters help IRS block fake tax refunds

The IRS has improved its efforts to block fraudulent tax refunds before the returns are even accepted, according to new figures the agency provided to a federal watchdog.

The Treasury Department’s inspector general for tax administration said the IRS uncovered roughly 163,000 fraudulent returns seeking refunds this year and stopped $787 million in fraudulent refunds from being sent out. 

{mosads}Those figures only go through May 2, less than three weeks after the April 15 tax filing deadline. At this time last year, the IRS had said it had identified more than a quarter million fraudulent returns and blocked around $160 million in refunds.

By the end of 2014, the IRS had singled out 2.18 million returns as fraudulent and sent out more than half a billion dollars worth of stolen refunds.

While the IRS’s latest numbers only cover four months for this year, the agency took credit in a statement for having “dramatically expanded the number of identity theft filters it uses to weed out” fraudulent returns before they can even enter the IRS’s processing system.

“The IRS continues to make significant improvements to its process to detect stolen identity refund fraud and block fraudulent returns from going out the door,” the agency said in its statement.

The new figures show progress for an agency that has had an uneven record at battling refund fraud, along with general cybersecurity problems, in general in recent years.

Commissioner John Koskinen and other top IRS officials have called identity theft and refund fraud one of the agency’s top challenges for several years now. 

But the IRS also acknowledged this year that the personal information of hundreds of thousands of taxpayers was compromised during the breach of a system that offered access to previous tax returns. 

IRS officials said they believed the thieves behind that cyberattack were seeking to file fake returns in 2016. The criminals used taxpayers using information culled from the black market and are thought to be part of an organized crime syndicate.

The IRS identified about $908 million worth of fraudulent refunds in the 163,000 returns it found, according to the data given to the inspector general.

Three years ago, the IRS said it identified more than 3.4 million fraudulent returns and wrongly gave out around $1.5 billion in refunds. Both those figures fell in 2013 and 2014.

It’s also tough to nail down an exact figure for how much in tax refunds the IRS actually gives to thieves. About a year ago, for instance, the Government Accountability Office found the IRS had paid out $5.2 billion in fraudulent tax refunds during the 2013 tax season.

The rash of high-profile data breaches across the United States in the last year has spurred a new era of unprecedented electronic tax fraud.

Massive cyberattacks at health insurer Anthem, JPMorgan and leading retailers including Home Depot have left hundreds of millions of people’s personal data on the black market. That cache of information is a gold mine for fraudsters, according to experts. 

And as electronic filing becomes increasingly common — 86 percent of taxpayers filed online last year — it’s easier than ever for digital crooks to file fake tax returns.

To battle that threat, the IRS has more than doubled the number of employees working on identity theft since 2011. It also bolstered security measures this year to better suss out fraudulent electronic filings. 

It was those new filters that helped reduce the number of fraudulent returns this year.

Lawmakers have proposed legislation intended to battle taxpayer identity theft and electronic tax fraud.

Senate Finance Committee Chairman Orrin Hatch (R-Utah) and ranking member Ron Wyden (D-Ore.) are backing a bill that would require stricter notifications if a taxpayer’s identity is stolen, push employers to file tax forms earlier, improve the electronic tax filing system and make punishments for identity theft harsher.

Hatch and Wyden had to pull back on consideration of the measure last week, after GOP tax writers objected to a provision that would give the IRS more latitude to regulate paid tax preparers. Republicans on Capitol Hill remain angry over the IRS’s improper scrutiny of Tea Party groups, and are loath to give the agency more power.

“We need to do a better job of protecting taxpayers,” Wyden said after the IRS revealed the full extent of a data breach.