Two senators want to know if the four federal payroll providers are doing enough to protect employees from identity theft.

Sens. Orrin Hatch (R-Utah) and Ron Wyden (D-Ore.) wrote to the Agriculture Department’s National Finance Center, the Pentagon’s Defense Finance and Accounting Service, the Interior Department’s National Business Center and the General Service Administration’s National Payroll Branch asking for details on their reporting of wage and tax statements.

“It is the responsibility of these shared-service centers to collect and transmit federal employee wage and withholding information to the Social Security Administration and to state tax agencies,” wrote Hatch and Wyden, the chairman and ranking member of the Finance Committee, respectively, in an Aug. 24 letter. “In light of the importance of this information in combating identity-theft related tax refund fraud, and recent reports that this information is often transmitted late, if at all…”

The lawmakers raise this issue in light of the massive data breach suffered by the Office of Personnel Management that exposed more than 22 million current and former federal employees.

Hatch and Wyden say state tax agencies reported to the committee that the shared service providers routinely fail to file employee specific information at all, much less in a timely manner.

“At a time when identity-theft related tax refund fraud has reached epidemic levels, the federal government should be doing all it can to ensure the integrity of the tax administration process, both at the state and federal levels,” the senators wrote. “To prevent identity-theft related tax refund fraud, federal and state tax administrators (tax agencies) increasingly depend upon the timely receipt of information from Form W-2, the taxpayer’s Wage and Tax Statement, which gives tax agency officials information on a taxpayer’s actual wages and tax withholdings. This information is critical in ensuring the accuracy of tax return filings and protecting against tax refund fraud. Unfortunately, because of differences between when tax agencies receive tax returns – and thus claims for tax refunds – and when they receive wage and withholding information from employers, tax agencies are pressed to issue tax refunds without having this critical piece of information.”

The senators asked for answers by Aug. 31 to several questions:

• Identify the federal agencies for which your center processes payroll information and the date on which each agency submitted employee-specific information for Form W-2 to the center for tax years 2012, 2013 and 2014.
• If an agency failed to provide this information to your center for one of these tax years, identify the agency and the tax year, describe why this information was not provided, and whether your center contacted the agency regarding that information.
• Identify the date on which your center provided each agencies’ employee Form W-2 data for tax years 2012, 2013, and 2014 to: the Social Security Administration; and each applicable State tax agency (if the information was sent to different states on different dates, break the information out for each state).
• If your center failed to provide this information to any of the recipients above, identify which recipients were not provided this data, the year it was not provided, and describe why not.

“Recent advances in information sharing between the IRS and state tax administrators aimed at jointly combating refund fraud make it all the more important that states have timely access to this data,” Hatch and Wyden wrote. “In addition, when federal employers fail to provide tax agencies with wage and withholding information in a timely manner, federal employees are also at an increased risk of identity-theft related tax refund fraud and delays in receiving legitimate refunds, as the state tax agency is unable to tell whether a tax return is stating correct or fictitious wage and withholding information. Recent data breaches involving millions of federal employees heighten this concern.”

Tax fraud is a growing problem the IRS is trying to combat.

The Government Accountability Office reported that in 2013 that the IRS prevented $24 billion from being sent to ID fraudsters, but still paid out $6 billion in improper payments to fraudulently-filed claims.

The IRS diverted 3,000 employees in 2014 to the division that handles identity theft cases to deal with a “huge spike” in fraud claims, IRS Taxpayer Advocate Nina Olson said earlier this year.
The tax agency is looking for new tools and technologies to combat refund fraud, but Wyden and Hatch are concerned that the shared service payroll providers need to do more as well.

The government completed its move to four shared service providers for payroll in 2009. GSA transferred its payroll processing to USDA earlier this year.

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