Reducing Identity Theft Refund Fraud

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20067797 - w2 tax form and social security cards

Combatting tax refund identity fraud is a top priority for the Internal Revenue Service (IRS). The agency’s website reports that through November of 2015, 1.4 million identity theft returns were successfully identified and $8 billion in fraudulent refunds were prevented. Another report from the Treasury Inspector General for Tax Administration (TIGTA) reports that tax fraud is down. While the IRS has made great progress in identifying fraudulent returns and reducing the backlog of identity theft cases, a recent Government Accountability Office (GAO) report states that there is room for improvement when it comes to providing service to victims of identity theft refund fraud.

Here are GAO’s recommendations for the IRS, but any tax agency would be wise to implement these suggestions to further reduce the number of future identity theft returns:

  1. Provide easy access and transparency by developing and maintaining a dashboard displaying customer service standards and performance information.
  2. Review the document retrieval and scanning processes to identify potential training or guidance needs or other potential efficiencies.
  3. Improve existing data and collect new data to monitor how often and why refunds are released before closing an identity theft or duplicate return case.
  4. Revise notices to identity theft fraud victims to include information such as whether dependents were claimed on the fraudulent return; dependents match those the taxpayer claimed during the same tax year; and, how to request a redacted copy of the fraudulent return.

Identity theft refund fraud is an area that continues to evolve and become more sophisticated. While all four of these recommendations play a key part in any tax agency’s success in preventing fraud, we’re going to take a closer look at the first and third suggestions with the goal of further reducing the number of future identity theft victims. In our opinion, these two recommendations are not mutually exclusive, rather should be integrated together to offer a more powerful, insightful and transparent fraud fighting solution to the IRS and any other tax agency.

An effective identity theft program has to start with data (i.e. recommendation #3) that is clean, usable, manageable and trackable. The data also needs to be cross-referenced and linked using unique identifiers with external public record databases to help ensure that all information submitted on the return is accurate and the proper identity is verified. In a matter of minutes, advanced linking and analytics can help understand the identity risk by verifying tax return information against billions of public records to identify potentially suspicious refunds. If a fraudulent submission is detected, tax agencies can also use a multi-layered identity authentication process to weed out the fraudsters.

Recommendation #1 above would require integrating the information and details identified through the analytics process in a comprehensive dashboard where investigators can easily identify connections between people, places and other relevant data to further detect suspicious patterns and schemes. This allows tax agencies to identify and intercept fraudsters before any more damage is done and, often, before distributing any refunds. From there, agencies can determine what dashboard information is released to the public to further extend the agency’s transparency efforts.

Identity-driven linking and analytics can help tax agencies identify fraudulent returns faster and more efficiently, preventing other honest, hardworking Americans from becoming a victim of identity tax refund fraud. Thanks to high-powered identity-driven solutions, tax agencies can use visual analytics and dashboard information to provide accurate information needed to maintain transparency with the public, satisfying GAO’s first recommendation.

There isn’t a tax agency or taxpayer immune to the impact of identity fraud, but tax agencies have a few options to choose from when it comes to protecting themselves and their taxpayers. In addition to GAO’s suggestions, check out the latest technology trends and measures that other tax agencies are taking to protect against identity theft refund fraud in 2017.

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Scott Straub
Scott is the Director of Federal Market Strategy at LexisNexis Risk Solutions and is responsible for developing data-driven solutions for governments in their fraud, waste and abuse prevention processes. Scott has invented several identity -products using the LexisNexis vast public record database and holds patents in these products designed to assist governments in preventing fraud, reducing improper payments and collecting delinquent receivables.