The federal government's top tax official told the Senate Finance Committee today that he doesn't know when his agency will be able to resolve thefts of taxpayers' identities.
Douglas Shulman, the new commissioner of the Internal Revenue Service, said his goal was to develop a seamless process to do just that but couldn't say when it would be completed.
"From the perspective of an identity theft victim," he said, "that means when the taxpayer calls the IRS that they reach someone who is knowledgeable on the issue and who is able to take care of the problem quickly and permanently."
In 2006, more than 50,000 Americans reported tax and employment related identity theft—an almost three-fold increase since 2002, according to the Federal Trade Commission.
Identity theft victims come to the IRS's attention in two ways. In refund-related crime, a criminal uses the victim's identity to file a fraudulent tax return. The IRS discovers the crime when it receives two tax returns filed with the same Social Security number.
The second scenario occurs when someone, generally an illegal immigrant, uses a victim's stolen Social Security number to land a job. This is called an employment-related crime and the IRS becomes aware of it only if victims notice the error on their W-2s or Form 1099s and they inform the agency.
According to National Taxpayer Advocate Nina E. Olson, the IRS had no method to assess how many Americans have suffered tax-related identity theft. The IRS has begun to track incidents of identity theft, she said, but only when the taxpayer informs the IRS and provides documentary evidence that it actually occurred.
"My personal belief," Olson said, "is that the IRS has many more cases of identity theft on its hands than it is estimating."
While Shulman could not tell the senators how long it would be before the resolution process is operational, he said the IRS has rolled out education, outreach, and victim assistance programs. Now, Shulman says, the IRS flags taxpayers' accounts once they are determined to be victims of identity theft. In 2009, this tracker will enable the IRS to distinguish a legitimate tax return from a fraudulent one.
Critics say the IRS doesn't do enough to treat victims of identity theft consistently, or to help them minimize the burden of responding to the crime.
"I am amazed the IRS has no mechanism for taxpayers to give the IRS a heads-up that their identities have been stolen," said Senator Max Baucus, chairman of the Senate Finance Committee. "Instead, the IRS tells victims to report the crime to the Federal Trade Commission. And then the IRS does nothing to coordinate with the FTC to use that information."
The IRS never explicitly tells victims their identity has been stolen, or that a fraudulent return has been filed using their Social Security Number, a fact that outraged Baucus. The omission, Olson says, leaves victims vulnerable to further fraudulent activity.
J. Russell George, inspector general for tax administration at the Treasury Department, complained the IRS does not do enough to prosecute those who use Social Security numbers to illegally gain fraudulent tax returns or gain employment. The IRS reserves prosecution, he said, for those cases involving broader criminal activities that involve large-scale tax evasion and fraud. The IRS only recommended criminal prosecution for 45 cases involving some component of identity theft in 2005. That number increased slightly to 55 in 2006.
George said the IRS could do more to combat employment and tax-related identity theft by passing pertinent tax information to federal law enforcment agencies, but, he said, "the IRS does not appear to be fully utilizing this authority."
By refusing to pass this information on, the IRS limits itself to public outreach as the primary weapon against identity theft , George said.