Tax identity theft a major problem too big to guess

In recent years, government officials and experts in the private sector turned a lot of attention to the problem of identity theft related to filing fraudulent tax returns. But now a federal agency says that the problem is so big that there's no way to even tell how widespread this type of fraud is.

The Internal Revenue Service is not in a position to know either the total number of tax return identity thefts, or the total cost these crimes have in any given year, according to a new report from the U.S. Government Accountability Office. The only thing the IRS can do is keep tabs on the number of fraud cases reported to it, but cannot estimate those that are undetected every year.

More on what the IRS doesn't know
While it may be troubling to consumers that the IRS doesn't know the total number or value of the fraudulent tax returns it processes and pays out every year, there is more that it needs to understand about these crimes, the report said. For instance, unless the agency pursues legal action against those suspected of filing bogus returns, it cannot know the true identity of anyone who submits such a document.

Further, it has no way of knowing whether an single fraudulent return is just that: One filed individually, or part of a identity theft scheme that may be taking place on a grander scale, the report said. This version of the crime is actually somewhat common, as criminals may obtain the personally identifying information for several people or more — sometimes as many as hundreds — and file tax returns for all of them using fake addresses, and other methods for making sure the fraud goes undetected. The only way the IRS could potentially spot such a widespread effort on the part of one or more criminals is by going through the filings themselves and noticing patterns that may arise across multiple returns.

Finally, and somewhat related to the problems of not knowing individual thieves' identities, the GAO was told that the IRS cannot ascertain the characteristics of what makes a known identity thief commit their crimes year after year, the report said. The IRS says it needs to do more to understand how these filings are being prepared and filed, as well as how they're being paid out on the agency's end.

Steps the IRS is taking
In the last few years, the IRS has begun to fully recognize the extent of this problem — not only that these types of fraud exist, but also that it has no way of understanding just how widespread the issue really is — and is now taking steps to correct the issue, the report said. For one thing, it is organizing an initiative called the Refund Fraud and Identity Theft Global Report, which keeps track of information about detected fraudulent filings and the ways in which the agency attempts to resolve them at various stages throughout its processes.

The GAO reviewed the Global Report to see just how effective it could be, based on data culled from other successful government reports, and said that in general the way it is set up could help the agency to better detect and stamp out fraud, the report said. However, more can also be done to ensure that the processes for handling data and getting it into the report are streamlined, such as clarifying what constitutes the kind of fraud in question, and where that data comes from.

How can this fraud affect consumers?
If a person's information is used by a criminal to obtain a fraudulent tax return, it could significantly endanger his or her financial wellbeing because it may complicate their ability to get their own return processed in a timely fashion, or at all. However, beyond that it may also be an indicator that more identity theft could be on the way, given that to file a fraudulent tax return, a crook needs a wealth of personal information that could be used for other crimes, such as opening an account or taking out a loan in the victim's name. This can create significant issues both with regards to their finances in general, but also their credit.

It is for this reason that it's vital for consumers to take the time to regularly check their credit reports. Looking over these documents can help to identify potentially unfair markings that can take a toll on their credit score. Fortunately, working with a credit repair company may help to alleviate those problems, and return both a borrower's finances and credit standing to where they deserve to be.

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