IRS crackdown on identity theft stops $1.1 billion in tax fraud

Newly implemented changes at the Internal Revenue Service have put a major dent in identity theft used to commit tax fraud, saving the government and taxpayers over a billion dollars last year alone, and potentially even more this tax season.

From January through April of 2016, the IRS prevented $1.1 billion in fraudulent refunds claimed by identity thieves on 171,000 tax returns, the Electronic Tax Administration Advisory Committee revealed in its annual report to the U.S. Congress this week.

In comparison, during the same period in 2015, the IRS stopped $754 million in fraudulent refunds claimed on 141,000 returns.

The improved efforts stem from the IRS Security Summit, which convened in March of 2015 to stamp out fraud and identity theft in tax returns. Despite a short development window, a number of actions were taken in preparation for the 2016 filing season, helping to curb fraud and theft and causing a major increase in efficiency.

The IRS also suspended 36,000 suspicious returns for further review from January through May 8, 2016, and $148 million in claimed refunds. That was twice the amount of the same period in 2015.

Accordingly, the number of identity theft victims fell considerably between 2015 and 2016. Data from the IRS Identity Theft Victim Assistance program showed a 48 percent drop in receipts.

Still, more than a quarter of a million people were affected by tax-related identity theft in 2016, leaving much work to be done.

The numbers could get even better in 2017: This year the IRS implemented new rules to further prevent identity theft and tax fraud, in the form of the Protecting Americans from Tax Hikes Act. The law mandates that the IRS must hold on to refunds claiming an Earned Income Tax Credit or Additional Child Tax Credit until mid-February.

The delay helps investigators with more time to dig into potential illegal activities. But the delays could also hurt lower- and fixed-income citizens, who had to wait longer to receive their tax returns this year.

While tax-related identity fraud may be on the decline, overall it saw an increase in 2016, according to data from Javelin Strategy & Research released earlier this year. They found that identity fraud grew by 16 percent in America in 2016, reaching the highest levels seen by the firm since it began tracking such fraud in 2013. Last year, an estimated 15.4 million Americans fell victim to identity fraud.