Justice Department, IRS Seek to Avoid Tax Identity Theft

The U.S. Justice Department and the Internal Revenue Service are working to head off identity theft aimed at stealing people’s tax refunds when the filing season begins in January, the government’s top tax prosecutor said.

The Justice Department will draw information from local prosecutions to identify patterns in the cases and help the IRS create computerized filters to block potentially fraudulent refunds. They peak each year in the first few weeks of the filing season as criminals try to get refunds under legitimate taxpayers’ names before those people file their own returns.

“The schemes can be extraordinarily simple, and they vary,” Kathryn Keneally, assistant attorney general for the Tax Division, told reporters today in Washington.

In a typical case, criminals steal or illegally purchase taxpayers’ identifying information from hospitals, medical offices, prisons and other places that have the data. They then file false tax returns, claim a refund and have the money deposited on a prepaid debit card.

The crime, which Keneally described as “horrifying,” exploits the tension between the IRS’s twin goals of preventing fraud and issuing refunds as quickly as possible.

In some cases, Keneally said, criminals have used the Social Security numbers of Puerto Rico residents, many of whom don’t have a federal tax-filing requirement. In these cases, she said, it can be difficult for the IRS to distinguish between fraud and a Puerto Rico resident who has moved into a state and owes taxes.

$15 Billion

In a Sept. 15 speech in Boston, IRS Commissioner Douglas Shulman said his agency this year stopped more than 3 million tax returns and determined that 90 percent of those were “bad.” He said the IRS blocked $15 billion in fraudulent payments from being sent, up from $11 billion the year before.

Shulman also questioned whether the agency should place a greater emphasis on fraud prevention and less on what he called a “sacred assumption” that refunds should be delivered as quickly as possible.

“We need to rethink the speed of refund paradigm,” he said, according to prepared remarks. “I’m the first to admit that this is a very delicate and difficult balancing act, but we should not and cannot shy away from the challenge.”

Shulman’s term ends in November, and he has said he doesn’t want to remain in the job.

Keneally also said today that the assignment of Tax Division attorneys to federal prosecutors’ offices around the country is ending as scheduled Oct. 1. Bloomberg News reported March 27 that 25 of the 95 prosecutors in the division had been given six-month assignments around the country.

“We are looking forward to welcoming back” the lawyers, who mostly worked on tax cases while they were working in other offices, she said. She said some of them, fewer than 10, accepted offers to remain outside Washington.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net