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Tax Return Fraud Is Still a Billion-Dollar Problem

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The Internal Revenue Service caught $12.1 billion in fraudulent tax returns resulting from identity theft in 2012, but the identity theft that went undetected likely amounted to $3.6 billion in tax fraud. That’s down $1.6 billion from the more than $5.2 billion in undetected fraudulent tax refunds issued in 2011, according to an audit by the Treasury Inspector General for Tax Administration (TIGTA). Still, identity thieves are raking it in.

The IRS has been trying to crack down on identity-theft-related tax fraud. But identity theft continues to be a widespread and costly problem, and victims tend to be individuals who are not required to file tax returns, the audit says.

The audit analyzed tax year 2011, for which returns are processed in 2012, and concluded about 1.1 million potentially fraudulent tax returns filed with stolen Social Security numbers went undetected. At the same time, the IRS caught more than 1.8 million identity theft tax returns from tax year 2011, which is more than it caught from tax year 2010 (less than 1.1 million).

But those numbers don’t tell the whole story, as noted in the audit summary. Following the aforementioned prevention statistics, the report states (in bold, italicized and underlined text): “The impact of identity theft on tax administration is significantly greater than the amount detected and prevented by the IRS.”

In the audit of tax year 2011, released Sept. 30 this year, TIGTA included potentially fraudulent tax returns filed with Individual Taxpayer Identification Numbers (ITINs) which are formatted like Social Security numbers but issued to “certain nonresident and resident aliens, their spouses and dependents who cannot get a Social Security number,” according to the IRS website. Potential tax fraud using ITINs amounted to about $385 million on top of the $1.6 billion tied to Social Security numbers in tax year 2011.

The IRS is working on catching identity theft in tax returns: In processing year 2012, the agency implemented 11 filters used to identify tax fraud, and in 2013, the number of filters increased to 80. Such filters have helped the IRS flag 151,010 tax returns and prevent about $840 million of fraudulent tax refunds from being distributed, as of May 30.

Still, much of identity theft protection is on the consumer. Maintaining strong security practices — like shredding junk mail, protecting your information online and securing your mobile devices — is crucial to helping avoid the destructive consequences of compromised personal information. But taking protective measures only covers part of it: Consumers must also monitor their credit reports, credit scores and bank accounts so they can easily spot and cut off illicit use of their financial resources. Consumers can get their credit reports for free once a year, and there are tools that let you monitor your credit scores for free, like Credit.com’s Credit Report Card, which also gives you an overview of your credit profile monthly.

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