The U.S. Government Accountability Office issued a May 25, 2011 Report on "Taxes and Identity Theft: Status of IRS Initiatives to Help Victimized Taxpayers"  (GAO-11-674T).  A summary and hyperlinks to the complete report are below:

Identity theft is a serious and growing problem in the United States.  Taxpayers are harmed when identity thieves file fraudulent tax documents using stolen names and Social Security numbers. In 2010 alone, the Internal Revenue Service ("IRS") identified over 245,000 identity theft incidents that affected the tax system.

 

The hundreds of thousands of taxpayers with tax problems caused by identity theft represent a small percentage of the expected 140 million individual returns filed, but for those affected, the problems can be quite serious.  The GAO was asked to describe, among other things, (1) when the IRS detects identity theft based refund and employment fraud, (2) the steps the IRS has taken to resolve, detect and prevent innocent taxpayers' identity theft related problems, and (3) constraints that hinder the IRS's ability to address these issues.

 

The GAO's testimony is based on its previous work on identity theft.  The agency has updated its analysis by examining data on identity theft cases and interviewing IRS officials.

 

Although the GAO makes no new recommendations, it reports on the IRS's efforts to address the GAO's earlier recommendation that the IRS should develop performance measures and collect data suitable for assessing the effectiveness of its identity theft initiatives. The IRS agreed with and implemented the GAO's earlier recommendation.

 

Identity theft harms innocent taxpayers through employment and refund fraud.

 

In refund fraud, an identity thief uses a taxpayer's name and Social Security Number ("SSN") to file for a tax refund, which IRS discovers after the legitimate taxpayer files. In employment fraud, an identity thief uses a taxpayer's name and SSN to obtain a job.  When the thief's employer reports income to IRS, the taxpayer appears to have unreported income on his or her return, leading to enforcement action.

 

The IRS has taken multiple steps to resolve, detect and prevent employment and refund fraud:

 

Resolve--The IRS marks taxpayer accounts to alert its personnel of a taxpayer's identity theft.  The purpose is to expedite resolution of existing problems and alert personnel to potential future account problems.

 

Detect--The IRS screens tax returns filed in the names of known refund and employment fraud victims.

 

Prevent--The IRS provides taxpayers with information to increase their awareness of identity theft, including tips for safeguarding personal information. The IRS has also started providing identity theft victims with a personal identification number to help identify legitimate returns.

 

The IRS's ability to address identity theft issues is constrained by (1) privacy laws that limit its ability to share identity theft information with other agencies; (2) the timing of fraud detection--more than a year may have passed since the original fraud occurred; (3) the resources necessary to pursue the large volume of potential criminal refund and employment fraud cases; and (4) the burden that stricter screening would likely cause taxpayers and employers since more legitimate returns would fail such screening.