Why Stolen Identity Refund Fraud is the IRS's Biggest Problem, and What Can Be Done About It (Part 3 of 3)

[Originally Published in the California Journal of Tax Litigation (November 2014)]

Part 3 of 3

By Daniel W. Layton

Potential IRS and Legislative Fixes

In its last report, TIGTA suggested that Congress needs to allocate resources to fix the problems associated with these schemes, stating:31

Once the IRS identifies a potential identity theft tax return, it must verify the identity of the individual filing the return. However, verifying whether the returns are fraudulent will require additional resources. Without the necessary resources, it is unlikely that the IRS will be able to work the entire inventory of potentially fraudulent tax returns that it identiPotefies, thus resulting in the issuance of refunds for those returns. The net cost of failing to provide the necessary resources is substantial, given that the potential revenue loss to the Federal Government of these tax fraud-related identity theft cases is billions of dollars annually.

Legislators are now paying attention to the stolen identity refund problem and have proposed some statutory fixes. For example, one gap in the criminal code is that prosecutors have limited predicate charges available if they want to use 18 U.S.C. § 1028A and those charges aren’t always a perfect fit. While 18 U.S.C. §§ 287 and 286 (submission of false claims to the government and conspiracy to defraud the government, respectively) are probably the most apt charges for the false returns themselves, and are the Title 18 charges prosecutors are most familiar with in tax cases, they are not included in the predicate offenses for “big A.”32 To fill this gap, Representative Kenny Marchant introduced a bill to add 18 U.S.C. §§ 286 and 287 to the list of predicate offenses on July 29, 2014. The bill was last referred to subcommittee on September 26, 2014.33

In addition, recognizing that 18 U.S.C §§ 286 and 287 are not tax specific and that 18 U.S.C. § 1028A does not include any tax-specific frauds as predicate offenses, the Joint Committee on Taxation has discussed adding revising I.R.C. § 7206 to include a criminal penalty for misappropriating taxpayer identity in connection with tax fraud. 34

However, while these additions may streamline the law and help prosecutors bring charges that apply more comprehensively to the crimes, prosecutors already charge these cases, juries are convicting on the current law, and courts are ordering substantial sentences. With the submission of patently false returns, adequate means of deterrence is not the problem. Rather, the problems are detection and prevention, which take resources to address. Legislation is popular, of course, without appropriations, because it brings political capital and doesn’t cost the taxpayers anything. However, there is no indication that making the criminal conduct even more criminal will have any net effect. Thus, TIGTA’s suggestion at the start of this section should not be forgotten.

So long as appropriate funding follows, a bill introduced only a few days after Marchant’s stands a better chance of limiting the IRS’s blood loss to identity fraud schemes. The Tax Refund Theft Prevention Act of 2014 was introduced on July 31, 2014, and, as of the date this article was drafted, has been referred to the Committee on Finance.35 That bill includes a fairly comprehensive list of changes to IRS procedures and potential changes to private-party information return filing requirements that would, at least until the schemes evolve again, make it more difficult for the current perpetrators to receive fraudulent refunds. The bill would require the IRS to implement a password system for return filing, require the IRS to set up an online information return filing and distribution system, and require the Treasury to issue regulations restricting the delivery or deposit of multiple refunds to the same mailing address or bank account. In addition, the Treasury (likely TIGTA) would be required to provide a recommendation to Congress on accelerating the schedule for filing information returns and improving the IRS’s information return matching programs to pick up on the bogus Forms W-2 and 1099 used in the schemes.36

Ultimately, loss prevention and asset protection would be wise investments for the government when it comes to stolen identity refund fraud. If Congress does not act swiftly and give the IRS both the tools and the resources to take swift action, it stands to lose tens of billions of dollars over the next few years given the current trajectory.

Click Here to Read Part 1 of 3 (A Digital Age Crime and A Tsunami of Fraud)

Click Here to Read Part 2 of 3 (The Government’s Response)


31 Semiannual Report to Congress – October 1, 2013-March 31,2014, TIGTA, available at http://www.treasury.gov/tigta/semiannual/semiannual_mar2014.pdf.
32 Instead, the underlying charges used are typically mail, wire, or bank fraud.
33 Taxpayer Identity Theft Prevention and Enforcement Act of 2014, H.R. 5236 – 113th Cong. (2013-2014), available at https://www.congress.gov/bill/113th-congress/house-bill/5236/text?q=%7B%22search%22%3A%5B%22H.R.+5236%22%5D%7D.
34 Technical Explanation of the Senate Committee on Finance Chairman’s Staff Discussion Draft of Provisions to Reform Tax Administration, Joint Committee on Taxation, (November 20, 2013) http://www.finance.senate.gov/newsroom/chairman/download/?id=c6073d9e-0dc5-4a70-9208-ca1203ea9dc4.
35 S.2736 (July 31, 2014), available at https://www.congress.gov/bill/113th-congress/senate-bill/2736/text.
36 This recommendation is echoed in Identity Theft – Additional Actions Could Help IRS Combat the Large, Evolving Threat of Refund Fraud, GAO-14-633, p. 10 (released Sept. 22, 2014), available at http://www.gao.gov/assets/670/665368.pdf, and the Senate Finance Committee’s own press release on the GAO report, GAO: Action Needed to Combat $5 Billion Tax Refund Fraud, 2014ARD 182-2113th Congress (September 22, 2014).