ID Theft Rising in Tax Fraud Cases but IRS Not Pursuing

Fraudulent tax returns filed as a result of identity theft jumped more than sixfold over the past five years, but the Internal Revenue Service rarely pursues or prosecutes such cases, a Treasury Department watchdog said in a report released Tuesday.

J. Russell George, the Treasury inspector general for tax administration, said the IRS must do more to combat the growing problem of employment-related and tax-fraud identity theft.

The agency has placed only limited emphasis on these issues, George said. "The IRS' policy is that identity theft will only be investigated if it is committed in conjunction with other criminal offenses having a large tax impact."

New IRS Commissioner Douglas Shulman, National Taxpayer Advocate Nina Olson and George were to testify before the Senate Finance Committee on Thursday regarding the identity theft problem.

"The IRS needs to help stop identity theft in the first place, and go after perpetrators with enough vigor to deter future crimes," Senate Finance Committee Chairman Max Baucus, D-Mont., said Wednesday in response to the report. "It's time for the IRS to tackle identity theft head on, as a much higher priority than they do today."

The report cites two main incentives for stealing another person's Social Security number and taxpayer identity: to file a fraudulent tax return to steal a tax refund or to obtain employment.

The report said that between 2002 and 2007 the number of fraudulent tax return complaints the Federal Trade Commission received soared from 3,000 to more than 20,000. In the same period, complaints concerning employment-related identity theft more than doubled, from 15,000 to 35,000.

It said the IRS has tried to stem identity theft through public outreach programs, including creating an identity theft site on its Web page. The agency is warning taxpayers to be vigilant about "phishing" scams in which unscrupulous people claim in e-mails or phone calls to be from the IRS and demand that people reveal Social Security numbers and other confidential financial material.

But the agency rarely recommends identity theft cases for prosecution, the report found. Of 2,720 prosecution recommendations made by the IRS Criminal Investigation Division in fiscal year 2006, 55 involved identity theft.

The inspector general said the agency's preventive strategy does not include pursuing individuals using another person's identity unless their cases directly related to a substantive tax or conspiracy violation.

It also faulted the IRS for not notifying employers and otherwise not doing enough to stop unlawful use of a taxpayer's identity.

The tax agency, in response, agreed with recommendations that it develop a strategy for dealing with the identity theft problem, including coordinating with other agencies such as the FTC and the Social Security Administration.

But the IRS said it is constricted in doing more because it does not have the enforcement resources to address most of the cases and because disclosure rules hinder its ability to share information with employers and other agencies.