By Jared Serbu
Reporter
Federal News Radio

Victims of identity theft who say they received shabby treatment from the IRS got a personal and public apology from the agency’s commissioner on Capitol Hill Thursday as lawmakers explored ways to tighten the agency’s internal controls to reduce the number of refunds it sends out to scammers.

In addition to testimony from Douglas Shulman, the IRS chief, members of the House Oversight and Government Reform Committee’s Subcommittee on Government Organization heard from three victims of identity theft of a very specific kind. Scammers had stolen enough personal information to file phony tax returns in their names and get refunds.

When the real taxpayers tried to file, the IRS told them their returns were duplicates. That led to, in at least one case, more than a year of waiting and hassle before they got the refunds they were due.

“I just want to personally apologize to the taxpayers sitting behind me,” Shulman said. “I know they had a very frustrating experience with the IRS. I always stress to our employees that we need to walk in each taxpayer’s shoes and understand their specific situation and needs.”

But the victims who testified said that’s not what they encountered.

Sharon Hawa, of Bronx, N.Y., first had her tax return rejected as a duplicate in 2009. She said she was scared and in shock.

“I immediately took measures to secure all of my personal assets, credit reports and accounts,” she said. “I mailed in hard copies of my returns to various IRS addresses, as instructed by different units within the IRS. After 12 months of back and forth confusion, the IRS’ identity protection specialized unit assigned me to an incredibly rude and hard-to-reach taxpayer advocate, where I had to explain my situation, resubmit the documents, and prove my identity all over again. It took a painstaking 14 months before I finally received my $6,604 refund. Meanwhile, I had to take on a second job to support myself and spend a lot of time, money and effort drafting letters and sending in the necessary information.”

But that wasn’t the end. This year, someone got a fraudulent refund using her social security number once again. Hawa said she has yet to successfully reach an identity theft specialist at the IRS for this year’s case.

The IRS stresses that it is not the cause of identity theft in these cases. Thieves have stolen personal information in some other way and then used it to file for a fraudulent refund.

But Shulman said the agency is focused on improving its ability to automatically spot those phony tax returns before a refund is sent out, a task made more difficult by the fact that the IRS typically does not know a taxpayer’s true earnings at the time he or she files the return.

“We put markers on accounts, which puts heightened scrutiny on the accounts (when they have been involved in fraud),” he said. “The key to those markers is setting up the right filters that block the criminals and don’t put too much burden on the victims. While not perfect, we’ve gotten a lot better. Two years ago, 80 percent of the returns that were tripped by our filters ended up being legitimate tax returns. This year, that’s almost reversed. 75 percent of the tripped returns ended up being the fraudulent taxpayers. So we’re going to keep getting better every year.”

The IRS will need to, since the crime is growing every year. According to the Government Accountability Office, there were nearly 52,000 identity theft-related fraud incidents on tax returns in 2008. In 2010 however, the number grew to 248,000.

Shulman said that since identity theft is now a major organized crime, syndicates may be responsible for many of those numbers, meaning the 2010 crimes were not committed by 248,000 individual criminals. But lawmakers are concerned that a lack of prosecutions in refund fraud cases is providing a big incentive for criminals to keep doing it.

Edolphus Towns, the ranking member of the subcommittee, said that’s somewhat understandable from the IRS’ point of view, given its limited investigative resources.

“I mean, how much do you want to spend to collect $500? I think we have to look at this, and I think we have a role here, and it’s not just the blame game,” he said. “I think it’s that we do some things legislatively to make it possible that anybody who takes somebody else’s money is charged.”

Members of Congress are considering the idea of changing privacy laws so that the IRS can share information with state and local law enforcement, which could then pursue some of the crimes involving lower dollar amounts.

An inability to do that is an issue identified by the Government Accountability Office, which found the IRS has very limited legal authority to share information on identity theft cases with outside law enforcement authorities, or even with taxpayers themselves.

“IRS can disclose identity theft-related events that occur on a taxpayer’s account to the taxpayer, such as the fact that an unauthorized return was filed using the taxpayer’s information or that the taxpayer’s (social security number) was used on another return,” GAO said in a report prepared for Thursday’s hearing. “However, IRS cannot disclose to the taxpayer any other information pertaining to employment or refund fraud, such as the perpetrator’s identity or any information about the perpetrator’s employer.”

Jim White, GAO’s director of strategic issues said his office also made recommendations for some longer-term improvements that could help cut refund fraud.

“Right now, IRS does not match tax returns to the W-2 forms that employers file until months after the filing season ends,” he said. “The first match is done in June. Part of the reason for that is that employers don’t have to send those to the IRS until either the end of February or the end of March. The refunds go out the door first, and then the matching is done afterward. If IRS can modernize their processing systems and if the due date for those wage statements could be moved earlier in the year, IRS could do matching before refunds go out and catch more fraud. This is something that’s years away. They’re working on their processing systems, but they’re not where they need to be right now.”

One shorter-term measure that could cut repeat fraud is the use of secret PIN numbers. Taxpayers who’ve been victims before would get a new number in the mail from the IRS every year. A return that included the number would breeze through, while a return without it would be rejected.

The IRS is piloting such a system right now and Shulman said the agency wants to expand the use of PINs. None of the three victims at the hearing had been issued PINs, and Shulman pledged to make sure that was changed.

He also promised, as a result of the hearing, to undertake a comprehensive review of the training IRS employees get for dealing with victims of identity theft.

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