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Identity Theft and Tax Fraud Issues May Cause the IRS to Shift W-2 Deadlines

Identity Theft and Tax Fraud Issues May Cause the IRS to Shift W-2 Deadlines

In an effort to mitigate the growing number of identity theft related tax fraud refund issues, the General Accountability Office (“GAO”) published a report on September 22nd, Identity Theft: Additional Actions Could Help IRS Combat the Large, Evolving Threat of Refund Fraud (“Report”). In its Report, the GAO recommends that the Internal Revenue Service (“IRS”) accelerate the filing deadline for Form W-2, Wage and Tax Statement, to January 31st and reduce the electronic filing requirement threshold for Form W-2 returns.

Background

It is estimated by the IRS that they paid approximately $5.2 billion in refunds related to fraudulent identity theft tax returns for the 2013 filing season; meanwhile, preventing $24.2 billion in fraudulent refunds based on what fraudulent information could be detected. The full extent of fraudulent refunds is unknown due to the challenges in detecting identity theft related refund fraud.

As noted in the Report, identity theft is able to occur due to the IRS’ “look back” model. This model allows the IRS to issue tax refunds after conducting selected reviews rather than waiting to hold refunds until completing all of its compliance checks.

GAO Report

The GAO Report has suggested that additional actions could benefit the IRS in combating the threat of tax refund fraud. As noted in the Report, “Identity theft refund fraud takes advantage of IRS’ “look-back” compliance model. Under this model, rather than holding refunds until completing all compliance checks, IRS issues refunds after conducting selected reviews. While there are no simple solutions, one option is earlier matching of employer-reported wage information to taxpayers’ returns before issuing refunds. IRS currently cannot do such matching because employers’ wage data (from Form W-2s) are not available until months after the IRS issues most refunds. Consequently, IRS begins matching employer-reported W-2 data to tax returns in July, following the tax season. If IRS had access to W-2 data earlier—through accelerated W-2 deadlines and increased electronic filing of W-2s—it could conduct pre-refund matching and identify discrepancies to prevent the issuance of billions in fraudulent refunds.”

The Department of the Treasury has recommended that the deadlines for filing Forms W-2 with the IRS be accelerated to January 31st. The GAO has suggested that the IRS fully assess the costs and benefits of shifting Forms W-2 deadlines and provide this information to Congress. Without all of the pertinent data, Congress is unable to deliberate the merits of such a significant change in the filing of W-2’s.

Additionally, the GAO recommends that the electronic filing threshold for information returns be reduced from the current 250-return threshold to include those filing five to ten Forms W-2. The Report further provides that, between the estimated cost savings of approximately $0.50 per electronically filed W-2 and the benefits provided to the IRS in supporting the pre-refund matching program, the GAO is of the opinion that this change is warranted. Due to the additional time required by the IRS to process paper forms, if this change is not implemented, it would be possible that employer’s paper filed W-2’s would not be available for the IRS review and matching until much later in the year.
Although the Treasury Department has proposed to accelerate the Form W-2 filing deadline to January 31st, the IRS has yet to fully assess the impacts of such a move. Without the IRS making a decision, Congress will be unable to have the necessary information to determine the merits of such a significant change or the use of pre-refund W-2 matching.

“The ability to narrow or close the gap between the time tax returns are filed and the time at which third-party information is available for use by the IRS is a concept with the potential to yield significant benefits to the government and to taxpayers, but can also impose burdens that must be quantified and carefully considered by policy makers,” wrote John Dalrymple, IRS deputy commissioner for services and enforcement, in response to the GAO’s Report. “Implementing such a change to the tax system would be a substantial undertaking, and we agree that Congress needs to have well-informed understanding of the costs and benefits in order to determine the best course of action.”

Conclusion

As the IRS continues to combat identity theft tax refund fraud, the GAO has been asked to review the IRS’ efforts in this area. This GAO Report was the first in a series that will review what type and breadth of knowledge the IRS has regarding the extent of identity theft refund fraud and the additional actions that may be taken.

Click to View GAO Report

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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.

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