Should Congress Increase the IRS Budget?

This past weekend’s Times cover story describing the dramatic rise in identity fraud targeting the United States Treasury is old news to tax professionals. It’s no secret that the IRS needs additional funding. Tax fraud is directly related to the IRS’s need for a bigger budget.

In her 2011 Annual Report to Congress, Taxpayer Advocate Nina Olson identified tax-related ID theft as one of the most serious problems facing taxpayers, noting that it was the premiere reason taxpayers sought her office’s help. As explained by Ms. Olson, “organized and not-so-organized criminals have sought to profit off the taxation policy by submitting bogus refund claims and often by swiping and utilizing the identity of another taxpayer. Each year, the IRS’s task in identifying these claims has come to be more challenging, with the inevitable result that some fake claims are never identified and many valid claims are erroneously held up, imposing significant burden on truthful taxpayers.” Ms. Olson added that ID thieves frequently file multiple returns using Social Security numbers (SSNs) belonging to others and, “by the time the actual taxpayers eventually file their returns may be blocked because their SSNs have previously been utilized for the same year.”

The IRS processes roughly one hundred million taxation estimates each year, the majority of which are filed in a short window, with many taxpayers depending on a quick turn-around of their refund claims. According to the Times article, the Treasury Dept.’s Inspector General for Tax Administration recently testified that while the IRS noted 940,000 fraudulent returns in 2010, thereby avoiding paying out $6.5 billion to ID thieves, it missed an extra 1.5 million fake returns, which resulted in more than $5.2 billion in fraudulent distributions.

Not surprisingly, Congress appears poised to make a response to the identity theft explosion by toughening the criminal penalties for those caught filing fake returns. The incremental deterrent effect of such enhanced penalties won’t exterminate the problem anytime soon. Meanwhile, the IRS must continue to throw scarce resources at safeguarding prevention from the increasing number of fake claims while limiting the fiscal and emotional costs and lost time suffered by the taxpayers.

On the positive side, the Times reports the IRS has already identified 2.6 million fraudulent refund claims this year, plenty of which are due to ID theft. The improved detection has been attributed to an increase in staff whose job is to target ID theft, distributing PINs to prior victims, and technological advances. Unfortunately, the IRS’s filters engineered to reveal ID theft are both under-inclusive (resulting in fake claims being paid) and over-inclusive (resulting in delays in paying valid refund claims, often to taxpayers who rely on their refunds for necessities). Given the IRS’s budget was cut by roughly $300 million last year, devoting resources to combating ID theft may take funding away from other important areas. Perhaps rather than depending on the questionable dissuasive effect of greater criminal sanctions, Congress should think about increasing the IRS’s budget, thus giving it the time and resources required to handle ID thieves without neglecting other enforcement priorities.

Perhaps you’ve failed to file taxes in the past and face IRS problems this year. If so, don’t hesitate to call the tax professionals at JG Tax Group today to resolve any issues you may be having.