Identity theft cost the IRS $5 billion last year. Here’s what Congress can do.

The IRS issues more than 40 percent of its refunds before receiving employers’ W-2 information to confirm filings, according to the Government Accountability Office. (Susan Walsh/AP)

Identity thieves stole an estimated $5.2 billion from the Internal Revenue Service last year, helped by the fact that the agency lacked timely information to detect fraudulent filings, according to federal auditors.

The Government Accountability Office said in a report this week that Congress should consider changing the deadline for employers to submit wage reports to the IRS, saying the move would help the agency verify individual filings.

Under current law, employers must file wage reports with the IRS by Feb. 29 if done on paper, or by April 2 if done electronically. Last year, the IRS had issued more than 40 percent and 60 percent of its refunds at those dates, respectively, the report said.

Moving the deadline for wage reports, or W-2s, to Jan. 31, as the Treasury Department has proposed, would “provide a powerful tool for IRS to detect and prevent [fraudulent/identity-theft] returns,” according to the GAO.

Below is a graph that illustrates how the IRS receives employer W-2s for months after issuing a big chunk of its refunds.

(Courtesy GAO)

Note: Employers are required to send W-2s to employees by Jan. 31 to provide ample time for preparing individual returns by tax day on April 15.

The GAO recommended the IRS study the potential costs and benefits of moving the employer W-2 deadline to Jan. 31 and report its findings to Congress, so that lawmakers can decide whether to take action. In it’s response, the IRS said it is trying to determine whether its resources and priorities align with the proposal.

“The burden this would impose on employers, the costs to the IRS for systems changes and the likely need for other changes (such as increased e-filing) means this step should not be taken without an informed discussion among all stakeholders, including Congress,” the GAO said.

Instead of changing the employer W-2 deadline, Congress could require the IRS to hold refunds until their wage reports are in. But taxpayers would likely disapprove of the resulting delays.

Identity thieves obtain fraudulent refunds by using stolen Social Security numbers and other identifying information from legitimate taxpayers.

The Treasury Inspector General for Tax Administration last year determined that the IRS had lost $3.6 billion through identity theft in 2011. The watchdog agency has not released estimates for subsequent years.

TIGTA said the problem is partly due to the IRS requiring examiners to answer telephone inquiries during the filing season and a lack of understanding about protocol.

The GAO said in its report that the IRS has taken steps to address the threat of fraudulent returns, including using third-party information, such as leads about suspicious refunds, to detect scam efforts.

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