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55–978—PDF 2008

S. HRG. 110–1031

IDENTITY THEFT: WHO’S GOT YOUR NUMBER?

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

APRIL 10, 2008

(

Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)
C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Salazar, Hon. Ken, a U.S. Senator from Colorado ................................................ 11

WITNESSES

Shulman, Hon. Douglas H., Commissioner, Internal Revenue Service, Washington, DC; accompanied by Linda Stiff, Deputy Commissioner for Services

and Enforcement, Internal Revenue Service, Washington, DC ....................... 3

Spencer, Rebecca, enrolled agent, Benedict’s Laser Tax Service, Billings, MT .. 5

Olson, Nina, National Taxpayer Advocate, Internal Revenue Service, Washington, DC ............................................................................................................. 7

George, Hon. J. Russell, Treasury Inspector General for Tax Administration,

Department of the Treasury, Washington, DC .................................................. 8

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Ensign, Hon. John:

Prepared statement .......................................................................................... 21

George, Hon. J. Russell:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 23

Responses to questions from committee members ......................................... 45

Grassley, Hon. Chuck:

Prepared statement .......................................................................................... 59

Olson, Nina:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 60

Salazar, Hon. Ken:

Opening statement ........................................................................................... 11

Shulman, Hon. Douglas H.:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 82

Responses to questions from committee members, with attachment ........... 100

Snowe, Hon. Olympia J.:

Prepared statement .......................................................................................... 126

Spencer, Rebecca:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 128

Responses to questions from committee members ......................................... 131

COMMUNICATION

Identity Theft Victim ............................................................................................... 135

(III)

(1)

IDENTITY THEFT: WHO’S GOT YOUR NUMBER?

THURSDAY, APRIL 10, 2008

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:05 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senator Salazar.

Also present: Democratic staff: Bill Dauster, Deputy Staff Director and General Counsel; Sam Mitchell, Legislative Assistant for

Senator Salazar; Mary Baker, Detailee; and Bridget Mallon,

Detailee. Republican staff: Steve Robinson, Chief Social Security

Advisor; and Nick Wyatt, Tax Staff Assistant.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

A Chinese proverb says, ‘‘Make your plans for the year in the

spring and your plans for the day early in the morning.’’ Each

spring, millions of Americans start to make their plans. Right after

they sign their tax returns with a sigh of relief, they begin to plan

how to spend their tax refunds. They dream about paying down

bills. They dream about buying a new TV. They dream about putting money in the bank. But for tens of thousands of taxpayers

each year, their dreams turn into nightmares. These taxpayers are

the victims of identity theft.

According to the Federal Trade Commission, during 2006 some

50,000 people complained about tax fraud and employment-related

identity theft. That is an increase, a significant increase; 4 years

earlier in 2002, there were just 18,000 cases, compared to 50,000

in 2006.

Some taxpayers learn they are victims right away. That is because the IRS rejects their returns; someone has already filed

using the taxpayer’s name and Social Security number. On average, it takes almost a year for the IRS to sort out who the real taxpayer is. In the meantime, the victim’s tax accounts get frozen. The

IRS issues no refund. The money that the taxpayer is planning on

does not come, and the taxpayer waits in tax limbo for months and

months.

Other taxpayers do not learn that they are the victims of identity

theft until years later. It is not until the IRS starts matching

W–2s to tax returns that the IRS detects the theft. Victims first realize that other people are using their identity when the IRS con-
2

tacts them and the IRS asks them why they did not report the income that appears on the W–2 forms with their names on it.

Both the National Taxpayer Advocate and the Treasury Inspector General for Tax Administration, otherwise known as TIGTA,

have called tax-related identity theft a serious problem. They argue

that the IRS lacks adequate agency-wide strategies, strategies to

ensure that victims of identity theft are treated consistently and

can minimize their burden.

The Advocate has identified at least 17 different functions within

the IRS that deal directly with private taxpayer information. The

TIGTA has reported as many as 240 computer systems at the IRS

that contain personal identifiable information.

Clearly, the IRS requires a comprehensive identity theft strategy

with goals, time lines, and milestones. That strategy needs to hold

IRS personnel accountable for reducing identity theft. I will call on

Commissioner Shulman to provide me with a status report on this

in 90 days.

I am amazed that the IRS has no mechanism for taxpayers to

give the IRS a heads-up that their identities have been stolen. 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.

I am disappointed that the IRS does not notify a taxpayer when

someone else has filed a return using the victim’s Social Security

number. I am astonished that some IRS processes actually appear

to facilitate identity theft. These involve returns filed by persons

using individual taxpayer identification numbers, otherwise known

as ITINs. These persons will sometimes attach W–2s to returns

with someone else’s Social Security number.

But ITIN holders usually cannot legally obtain a Social Security

number, so returns with both an ITIN and a W–2 with the Social

Security number should raise a red flag. But the IRS processes

these returns without asking any questions. The IRS deliberately

looks the other way. In fact, the IRS changed its electronic filing

filters last year so that returns filed using both an ITIN and a Social Security number would not be rejected.

You would think that the IRS would flag those returns, but they

do not. You would think that the IRS would notify the rightful

owner of the Social Security number that someone else is using

that number, but they do not. I am dismayed that the IRS does not

do more to stop identity theft. The IRS generally will not prosecute

an identity theft case unless it is part of a larger crime.

Victims of identity theft deserve better. They deserve consistent

procedures no matter what part of the IRS they are dealing with.

They deserve a way to forestall problems with the IRS once they

discover they are victims. They deserve to be notified when someone else uses their Social Security number.

Identity theft is serious. It is a crime. It is growing. America’s

taxpayers must be able to trust that the IRS is doing all that it

can to protect their identity. It is time for the IRS to stop stalling.

It is time for the IRS to make and implement an effective plan to

deter, to detect, and to stop identity theft. It is time to end the

nightmare for countless American taxpayers who fall victim to

identity theft.
3

Now we will hear from our witnesses. First, we will hear from

IRS Commissioner Doug Shulman, in his debut appearance before

this committee as Commissioner. I note that the former Acting

Commissioner of the IRS, Linda Stiff, currently the Deputy Commissioner for Services and Enforcement, will join Mr. Shulman at

the witness table, although it is my understanding she will not

make a statement.

Next, we will hear from Becky Spencer, an enrolled agent from

Billings, MT who will tell about the challenges faced by one of her

clients, a victim of identity theft. I want to thank you, Becky, very

much for taking the time—it is a long distance and expensive—to

be here today.

Next is Nina Olson, the IRS National Taxpayer Advocate.

Then we will hear from Russell George, the Treasury Inspector

General for Tax Administration, to review TIGTA’s findings.

Our usual practice, as I am sure most of you know, is to speak

for about 5 minutes, and your statements will be automatically included in the record. I want to apologize in advance that I will

have to leave the hearing to attend a conference on the farm bill

that was just called yesterday at 7 o’clock in the evening. It is not

very good planning, but there it is. But we are very honored and

lucky to have Senator Salazar from Colorado to chair the hearing

today. Thank you all very much.

Why don’t you begin, Mr. Shulman? Thank you.

STATEMENT OF HON. DOUGLAS H. SHULMAN, COMMISSIONER,

INTERNAL REVENUE SERVICE, WASHINGTON, DC; ACCOMPANIED BY LINDA STIFF, DEPUTY COMMISSIONER FOR

SERVICES AND ENFORCEMENT, INTERNAL REVENUE SERVICE, WASHINGTON, DC

Commissioner SHULMAN. Thank you, Mr. Chairman. I appreciate

the opportunity to appear before the committee. This is my first

hearing, as you said, before the Senate Finance Committee. I have

been on the job under 3 weeks now, and I want to thank you and

all the members of the committee for your support during the confirmation process.

As you mentioned, I have asked Linda Stiff to accompany me

this morning to make sure we can answer any questions you have,

given that I am so new on the job. Let me just say, Linda did an

excellent job leading the Agency as Acting Commissioner before I

arrived.

My understanding is that this is the annual hearing of the Senate Finance Committee and that you wanted an update on the

budget, the filing season, and the stimulus package and payment.

Those are included in my written testimony. Therefore, with my

limited time, I will make a couple of comments about those issues

and then move on quickly to the primary purpose of the hearing:

identity theft.

First, I urge members of the committee to support IRS’s 2009

budget. That budget has a number of legislative proposals designed

to help improve voluntary compliance. I would also like to commend the committee for, last week, releasing a bipartisan discussion draft of the administration’s proposal to require information

reporting for banks and other entities on reimbursements to mer-
4

chants that accept electronic forms of payment, including credit

cards.

Second, I want to make sure you know we are working hard on

getting stimulus payments out to the American people. We expect

the first payments to be direct-deposited into taxpayer accounts in

early May, with checks going out soon thereafter.

We have also made a concerted effort to reach out to people who

normally would not have to file tax returns who may be eligible for

stimulus payments to make sure they have all the information they

need and help from the IRS to file their return and get their stimulus payment.

Let me now turn to identity theft. My overall goal for the IRS

in any area of service is to ensure that, when a taxpayer contacts

the IRS with an issue or concern, we have in place a seamless process that gets the issue resolved promptly. From the perspective of

an identity theft victim, that means that, when a taxpayer calls the

IRS, that they reach someone who is knowledgeable on the issue

and is able to take care of the problem quickly and permanently.

I discussed the issue of identity theft with the senior leaders at

the IRS my first day on the job 21⁄2 weeks ago. I have also had the

opportunity to discuss this issue with Russell George, the head of

TIGTA, Nina Olson, the National Taxpayer Advocate, and I believe

they both made a number of constructive suggestions to the IRS regarding the handling of identity theft issues.

When I met with the senior staff my first day on the job, they

told me, and they agreed with Chairman Baucus, that the IRS is

not where it needs to be in meeting the goal of seamless service

to taxpayers who are victims of identity theft. They recognized this,

and the senior staff of IRS has been working on solutions.

I would like to highlight some of the things that we have worked

on most recently to reduce the burden on taxpayers in the event

of an identity theft. By this fall, the IRS will have people specially

trained to help taxpayers who have been victims of identity theft.

When you call the IRS, you will be routed to a specially trained

person.

We have also created an office to bring focus and an agency-wide

approach to identity theft and data security issues, and have updated agency-wide procedures to make sure that an identity theft

victim has consistent treatment when they come into the IRS and

identify them as someone who has had their identity stolen.

We also are implementing a new service-wide identity theft indicator that tags the taxpayer’s account once identity theft has been

established. Once this new process is fully deployed, taxpayers

should only have to provide identity theft documentation once, and

this will allow a taxpayer to call the IRS and self-identify themselves as a victim of identity theft. IRS will be able to tag it, flag

that account, and watch out for further issues of identity theft.

We are also working on making our standards for the documentation we need from a taxpayer to prove that they are that taxpayer easier, so identity theft victims have an easier time with the

IRS.

Finally, as Chairman Baucus noted, in the past we did not always identify and tell someone that someone else had used their

Social Security number, and we are working on doing that now in
5

our outgoing communications to taxpayers so they will know if

someone else is using their Social Security number.

Finally, we have developed a specialized group of people trained

to expedite any identity theft issues related to economic stimulus

payments. We want to make sure that everyone who is entitled to

an economic stimulus payment receives the payment as soon as

possible.

In closing, I want to assure you that Linda and I, as well as our

entire leadership team, are committed to continuing to work to reduce the impact of identity theft on taxpayers. We understand the

personal devastation that an individual feels when their identity

has been stolen. We also understand that, when a victim of identity

theft seeks assistance from a government agency, they have a right

to expect that that agency will help them, not add to their problem.

You have my assurances that we will continue to work diligently

to reduce the burden that is placed on taxpayers and the tax system because of identity theft.

Thank you very much. I am happy to answer any questions.

Senator SALAZAR. Thank you, Commissioner Shulman. We appreciate having you in front of the Finance Committee for the first

time in your capacity as a confirmed Commissioner of the IRS, and

look forward to working with you. We will have a series of questions after we go through the rest of the panel.

[The prepared statement of Commissioner Shulman appears in

the appendix.]

Senator SALAZAR. Ms. Spencer?

STATEMENT OF REBECCA SPENCER, ENROLLED AGENT,

BENEDICT’S LASER TAX SERVICE, BILLINGS, MT

Ms. SPENCER. Thank you, Chairman Baucus and Ranking Member Grassley, for this opportunity to share my experience regarding

tax-related identity theft with the members of the Senate Finance

Committee.

In 1975, I took over my uncle’s tax practice, and since that time

the business has grown to over 6,500 tax clients annually. I am an

enrolled agent, and my office was the very first e-filer in the State

of Montana.

At first, e-filing was very restricted. Not only did you need a special modem, but there were identity checks and compliance visits

to all electronic return originators. But since that time, e-filing has

been opened up to the entire world. Anyone with a little prior planning can take a laptop into a cyber cafe ́ with a stolen Social Security card and a valid Employer Identification Number and file a

U.S. income tax return.

On January 14 of this past year, 3 days after e-file opened, one

of my long-time tax clients came to the office and filed her tax return. The following morning, we got an IRS acknowledgement that

her return had already been filed. Someone had used this single,

financially struggling mother of two’s identity and filed a tax return on January 13th, well before most people can legally file.

Well, my client, of course, was in tears, and not knowing who to

call, I started with the IRS Criminal Investigation 800 number.

The recording there states, ‘‘If you would like to file Form 3949–

A, please order this form by calling 1–800–IRS–FORM. This form
6

can also be ordered on our website at www.irs.gov,’’ et cetera, et

cetera. There is not even an option to leave your name and phone

number or to wait for a representative, and previously that wait

had been a very long wait.

I called the IRS e-help desk next at the service center, and their

response was, ‘‘She’ll have to file a paper return.’’ Well, next I sent

my client down to the local IRS walk-in center, where she was

again told to file a paper return. The taxpayer’s name and Social

Security number were on that return that had been filed, so I

thought she should be entitled to a transcript, but she was, in essence, denied access to her own tax account.

The walk-in office could not even help her until she gave them

her birth certificate, the FTC form that Senator Baucus talked

about, and a written copy of the police report, which took several

days for her to get. After that, she was finally referred to the Taxpayer Advocate Service, who finally helped to resolve the case.

Well, the taxpayer was worried that her children’s identities had

been stolen and that was of great concern, but we were able to find

out that that did not happen by calling the Refund Loan Bank. But

the bottom line is, 10 days after the Internal Revenue Service had

been notified that there was a problem, the Service released that

refund to the fraudulent taxpayer, and it was only because the

bank I called held the refund until the IRS sorted out who it belonged to that it did not actually get sent to this fraudulent person.

Two months later, after contact with at least four IRS functions,

the victim finally received her refund.

Now, my office gets calls early in the tax season every year asking to prepare the return from a final pay stub. When we tell them

they cannot legally do so, they say, oh, I will just do it myself on

the Internet. A taxpayer who is not following the rules only needs

last year’s Employer Identification Number.

Now, among these early filers are not only the thieves who are

outright stealing an identity, but also those who are claiming exemptions that they know the ex-wife is entitled to, or whatever.

These returns are a big financial drain on the system because they

result in audits, amended returns which must be hand-processed,

or, as would have been the case in my example, outright loss of the

refund amount.

My client had her identity stolen as a result of a lost government

credit card. Does anyone in this room have a government credit

card? Based on my experience as an enrolled agent, I have several

recommendations for safeguards that the IRS might use to detect

and stop identity theft that I would be happy to discuss.

Thank you so very much.

Senator SALAZAR. Thank you very much, Ms. Spencer. Thank you

for sharing the real-life stories of people who are affected by identity theft in Montana. Thank you for making the trip from Billings

all the way to Washington, DC.

[The prepared statement of Ms. Spencer appears in the appendix.]

Senator SALAZAR. Ms. Olson?
7

STATEMENT OF NINA OLSON, NATIONAL TAXPAYER

ADVOCATE, INTERNAL REVENUE SERVICE, WASHINGTON, DC

Ms. OLSON. Chairman Baucus, Senator Salazar, and members of

the committee, thank you for inviting me to testify about identity

theft, which is the number-one consumer complaint in the United

States today.

In tax administration, identity theft arises when an individual

intentionally uses the Social Security number of another person either to fraudulently obtain employment or to file a false tax return

in order to obtain a fraudulent refund. In recent years, phishing

cases are increasing. That is when someone poses as the IRS, or

even the Taxpayer Advocate Service, in order to obtain a recipient’s

personal information.

I would like to emphasize six key points about identity theft that

reflect the taxpayer perspective.

First, identity theft results in serious consequences for the innocent taxpayer. These consequences may include delay or denial of

refunds, assessment of tax debts resulting from income reflected on

the fraudulent filer’s return, and a requirement for victims to prove

their identity to the IRS year after year.

Second, the IRS has no idea how many cases of tax-related identity theft exist. Until this year, the IRS had no method to systemically track identity theft cases. Its new procedures, while they represent a good first step, will still result in a substantial undercounting of identity theft cases. Based on the cases we have seen

in the Taxpayer Advocate Service, the problem is far more widespread than the available IRS data suggests.

Third, the procedures for handling identity theft cases are unduly burdensome to taxpayers and need to be improved. Let me describe some key points. When a taxpayer first contacts the IRS due

to a delayed refund or in response to an examination or a collection

notice for income that the taxpayer did not earn, the taxpayer generally does not know that he or she is the victim of identity theft.

The IRS customer service representative will observe a duplicate

return filing on the IRS data system and generate a letter to all

persons who use the SSN, informing each that there may be a

problem with the SSN used on the return, requesting proof of identity and including a questionnaire about the filer’s past use of the

SSN.

If none or all of the SSN users respond to the first letter within

40 days, the IRS assigns a temporary IRS number, or IRSN, to

each user of the SSN, including the identity theft victim. The IRS

then sends a second letter that must appear extremely confusing

to taxpayers. In that letter, the IRS first tells the taxpayer that he

must use an IRSN, and second, tells the taxpayer that because he

is using an IRSN he will not receive the Earned Income Tax Credit

or the Child Credit, or other such benefits until the IRS can

straighten out the SSN, and finally tells the taxpayer that he

should claim those credits anyway using the IRSN on the return.

These instructions undoubtedly confuse many taxpayers and may

intimidate others, making them less likely to claim the EITC or

other tax benefits.

The IRS does not call taxpayers to discuss any of these developments. All communication is done by correspondence, which might
8

be incomprehensible to someone with low literacy. The phone number listed on the letter is usually a toll call for the taxpayer, which

might deter a low-income taxpayer from calling for assistance. Basically, IRS needs to think about the taxpayer when designing its

procedures.

Fourth, the IRS’s new identity theft indicator, which I have long

advocated, will reduce the burden on taxpayers who experience

identity theft in recurring years by placing an indicator on their account once they have proved their identity the first time. However,

the IRS has no central guidance about how to apply the indicator,

thus an identity theft victim’s account may be handled differently

depending on which part of the IRS he or she contacts.

Fifth, the IRS does not follow coordinated procedures that can

address an identity theft victim’s issues from start to finish. Multiple IRS functions work on various aspects of identity theft cases,

but no function is responsible for addressing all Federal tax issues

to make the taxpayer whole.

In my 2007 report to Congress I recommended that the IRS develop a dedicated centralized unit to handle all identity theft cases

and a centralized chapter in the Internal Revenue Manual to house

all identity theft procedures. A centralized unit will be able to identify trends and systemic problems and can serve as a central point

of contact for discussions with the Social Security Administration

to improve processing.

Victims of identity theft would have a single point of entry into

the IRS and could more readily check on the status of their identity

theft-related account issues. All IRS functions could coordinate

with that function to better assist identity theft victims, regardless

of their specific tax problem.

Finally, I commend the Treasury Department for issuing regulations that will reduce the risk of identity theft overseas. In recent

years accounting firms have increasingly been outsourcing return

preparation to preparers located in other countries. While section

7216 of the code generally makes it a criminal offense for a tax preparer to disclose tax information to third parties, the U.S. Government cannot reasonably enforce that law overseas. This puts a taxpayer’s personal information at greater risk of being sold or misused. The recently issued regulations adopt a very balanced approach by allowing U.S. preparers to share most of the taxpayer’s

tax return information overseas with the taxpayer’s consent, but

requiring preparers to redact the taxpayer’s SSN.

Thank you. I will be glad to answer any questions.

Senator SALAZAR. Thank you, Ms. Olson.

[The prepared statement of Ms. Olson appears in the appendix.]

Senator SALAZAR. The Honorable Russell George.

STATEMENT OF HON. J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION, DEPARTMENT OF TREASURY, WASHINGTON, DC

Mr. GEORGE. Thank you, Senator Salazar. I would also like to

thank Chairman Baucus for the opportunity to testify on the growing problem identity theft poses to the administration of our Nation’s tax system.
9

Each year more than 130 million taxpayers entrust the IRS with

their sensitive financial and personal data that are stored in, and

processed by, IRS computer systems. The risk that this sensitive

data could be compromised continues to increase. Most of the IRS’s

approximately 100,000 employees and contractors have access to at

least some of this information on a daily basis. Both internal factors, such as the increased connectivity of computer systems and

greater use of portable laptop computers, and external factors, such

as a volatile threat environment related to increased phishing

scams and hacker activity, contribute to these risks.

Insider attacks by employees and contractors continue to be a

concern because employees and contractors are more familiar with

the IRS network than outsiders and can potentially do more harm.

TIGTA’s penetration tests on the IRS’s internal network have

shown that disgruntled employees and contractors could gain unauthorized access to passwords and sensitive systems data due to

high-risk vulnerabilities, which are also well-known to the hacker

community.

There are two primary types of identity theft related to tax administration. The first involves an individual who steals another

person’s name and Social Security number to file a fraudulent tax

return in order to steal a tax refund. The second type, employment

identity theft, involves an individual who uses someone else’s identity to obtain employment which results in taxable income reported

to the wrong taxpayer.

As noted by Chairman Baucus, the Federal Trade Commission

reported that in 2007 more than 56,000 people complained that

they had been victimized by one of these two types of identity theft.

The IRS’s identity theft program has primarily focused on public

outreach and education. However, its processes and procedures

have been inadequate in reducing the burden for taxpayers who

have been victimized.

When the IRS becomes aware of employment-related identity

theft, it does not take action unless the case directly relates to a

substantive tax or conspiracy violation. The IRS cannot notify employers when it has information which indicates that an employee

may be using another person’s identity to obtain employment because of restrictive confidentiality and disclosure provisions in the

tax code.

Other systemic problems also hamper the IRS’s ability to ensure

the security of sensitive taxpayer information. For example, the

IRS does not collect all transactions and audit trails on its modernized systems. This type of review is needed to determine whether

IRS employees are illegally browsing through taxpayer files.

The IRS is deploying new systems that lack detection capabilities. Without these audit logs, the IRS does not know what configuration changes were made, or who makes them. Intruders and illintended IRS employees who have access to these components

could steal taxpayer information with little chance of detection.

To compound the risk that personal information could be lost or

stolen, some IRS employees regularly take laptop computers containing sensitive information outside their offices to carry out their

audit or collection duties. To address these challenges, security

must become part of the fabric of the IRS.
10

In September of last year, TIGTA reported that managers continue to give employees access to systems they do not need to carry

out their job responsibilities. Because the IRS sends sensitive taxpayer and administrative information across its networks, routers

on the networks must have sufficient security controls to detect

and deter unauthorized use.

TIGTA found that access controls for IRS routers were not adequate, and reviews to monitor security configuration changes were

not conducted to identify inappropriate use. Essentially, the IRS

had no idea who had access to its network components.

We have recently reported that the IRS has not placed sufficient

emphasis on employment-related and tax fraud identity theft strategies. Its prevention strategy does not include pursuing individuals

using another person’s identity unless a given case directly relates

to a substantive tax or conspiracy violation, as I noted.

According to IRS policy, the actual crime of identity theft will

only be investigated by its Criminal Investigation Division if the

crime is committed in conjunction with other criminal offenses having a large tax effect.

In fiscal years 2005 and 2006, the IRS recommended only 45 and

55 cases, respectively, for prosecution that included charges of

identity theft. In addition, actions taken in response to employment-related identity theft are not adequate to stop the unlawful

use of the identity. Although the Social Security Administration notifies employers of mismatches between names and Social Security

numbers, the IRS does not. A serious problem develops for lawful

taxpayers when both their names and Social Security numbers are

used by others to gain employment.

Because the IRS and the Social Security Administration assume

that the information on an employee’s W–2 form is accurate, the

earnings resulting from the identity theft will be attributed to the

lawful taxpayer for determining both Social Security and tax liabilities. The IRS does not pursue the taxes that might be due on income earned using a stolen identity because it contends it does not

have sufficient enforcement resources to address most of the identity theft cases.

Furthermore, the IRS holds that it is not worthwhile to pursue

enforcement of employment-related identity theft cases for unreported tax liabilities because the taxes owed in most of these cases

are not significant. TIGTA is concerned that if the IRS takes no additional action to address the misreporting of income resulting from

identity theft, there is no deterrent to keep the problem from

spreading.

The IRS advised TIGTA that it is implementing a 5-year strategy

for its Privacy, Information Protection, and Data Security Office

that will include identity theft issues. However, it did not state

when this strategy will be implemented, what milestones will be

established, and how its success will be measured.

Overall, the IRS lacks the comprehensive data needed to determine the impact of identity theft on tax administration. It also

faces enormous challenges of securing the vast amount of personally identifiable taxpayer information that it stores.

I hope my discussion of tax-related identity theft will assist you

with your oversight of the IRS. Thank you, Senator Salazar.
11

Senator SALAZAR. Thank you, Mr. George. We appreciate your

testimony.

[The prepared statement of Mr. George appears in the appendix.]

Senator SALAZAR. Chairman Baucus, first of all, chaired this

hearing at the outset, but as he indicated, we have worked long

and hard on a very important piece of legislation, and that is the

farm bill, which has been 3 years in the making, and he is a spearhead of that conference and we need to make sure we are represented there, so that is why he is there and I am here, because

it takes about 26 years to make it from the end of the table to here.

[Laughter.]

And Ranking Member Grassley is, I think, also participating in

that conference, and also has a Judiciary Committee hearing, as I

understand it.

So I am going to make my own statement, and then I have a series of questions from both the chairman, as well as myself.

OPENING STATEMENT OF HON. KEN SALAZAR,

A U.S. SENATOR FROM COLORADO

Senator SALAZAR. Today’s hearing marks the Finance Committee’s annual examination of issues and challenges related to tax filing season. It is the time of year when many Americans are working very hard to complete their tax returns in order to submit them

to the IRS prior to that dreaded deadline of April 15th.

Given the complexity of the process, the importance of getting it

right, and the sensitivity of the information contained in those returns, tax filing season has a number of important implications

that deserve to be examined in greater detail. Therefore, I appreciate Chairman Baucus and Ranking Member Grassley’s decision

to hold this hearing at this time during tax season.

One of the issues we examined at last year’s tax filing season

hearing was the ease with which criminals can access taxpayers’

private personal information and use it to file a fraudulent tax return with the goal of receiving a tax refund that is not rightfully

theirs. These scenarios present particularly difficult challenges to

the IRS, which must work to crack down on fraud of this kind

while continuing to be as responsive and user-friendly as possible

to law-abiding citizens.

This focus that we have this year on identity thieves, but more

importantly on their victims, is something that is important for all

of us. I hope we can continue to examine how we can improve the

system and that the report that Chairman Baucus requested of

you, Commissioner Shulman, within 90 days, will hopefully address some of the issues and concerns and recommendations that

we have heard from the rest of the panel here.

I served as Attorney General of my State of Colorado for about

6 years and worked with the National Association of Attorneys

General and others with respect to the growing issue of identity

theft. It certainly goes beyond what happened with the IRS with

respect to tax refunds, but also we have seen, especially in the new

age of the Internet, and technology, and e-filing, that what we are

looking at is really the number-one consumer protection complaint

that we have across the country, and it seems to me, based on the
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testimony that we have heard here this morning, that that is being

seen here with respect to the IRS.

Let me start out with you, Mr. Shulman. First of all, you heard

from Ms. Spencer, Ms. Olson, and I think Mr. George with respect

to what they consider to be an inadequate response on the part of

the IRS whenever you have a victim. You can imagine anyone out

there, including the mother that Ms. Spencer described, being a

victim of identity theft, calling the 800 number and essentially

going into the ‘‘La-La Land’’ of talking to robots and not being able

to talk to a person. And the frustration that that mother must have

felt is probably felt by every single person who is a victim of identity theft with respect to their tax refund.

So give us, if you will, the highlights of how it is that you intend

to address the concerns of being an advocate for the victim as Commissioner of the IRS.

Commissioner SHULMAN. Yes. Thank you, Senator, for the question. Let me first, on behalf of the IRS, say to Ms. Spencer that

she should pass along that your taxpayer should be treated better.

We recognize that and we are working on it. So, our apologies for

the experience that she went through. Also, it is always helpful, as

we talked about in my confirmation hearing—we are a big government agency, we have 106,000 people, we have important jobs to

do—to make sure we understand the personal stories of people so

that we are helping people and citizens get through to and work

with us.

I think that I outlined a number of steps that we are taking, a

lot of them being ones that I think Mr. George and Ms. Olson, in

their testimony, pointed out we should be doing. As I told you,

Linda has been an incredibly strong leader, whom I think shares

my belief that we should always be getting better and we should

view people like Ms. Olson and Mr. George as strategic assets of

the IRS, who can point out where we can get better. They have

ideas, and we have the resources and the means to improve them.

I think one is, we are going to have specialized people in place

at the IRS by this fall who would have been able to answer and

sort through all the issues at the IRS that Ms. Spencer’s client experienced. So it will not be just going out to the masses and having

different divisions working, and you will have a person that you

will get to who is specially trained by this fall.

Second, there is this issue that——

Senator SALAZAR. Let me ask you, just on that, Commissioner

Shulman. Will someone like Ms. Spencer’s client, once you have

that system up, have the ability to contact a person directly and

actually get to talk to a person immediately upon making that

phone call?

Commissioner SHULMAN. Yes.

Senator SALAZAR. Or are we still going to be dealing with voice

mail and other recordings where you are not going to have that

kind of human interaction? It seems to me that in these kinds of

circumstances what people want to do is, they want to have a dialogue with somebody who is going to be able to guide them as opposed to entering into this land of no response.

Commissioner SHULMAN. This will be getting to a person who can

help sort through your issue.
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Senator SALAZAR. In other circumstances, domestic violence circumstances, other criminal jurisdiction issues, one of the things

that we have done on the consumer protection side, at least, when

I was Attorney General was to set up hot-lines to address these

kinds of issues. Will we have that kind of a capability here where,

if you have somebody who has been a victim of identity theft, that

they will be able to easily access a certain number and talk to a

real-life person?

Commissioner SHULMAN. There will be a clear place on the

website for those who prefer to use the Web, and two, there is the

800 number. If you say the words ‘‘identity theft,’’ you will be sent

to a person who is trained to deal with identity theft victims.

Senator SALAZAR. And will we have enough personnel within

that station to be able to make sure that you do have a human

voice and a human response to that victim?

Commissioner SHULMAN. That is my goal. As you know, I am 3

weeks onto the job. My answer will be yes, but I need to look at

resources and make sure how we allocate them so we have people

there.

Senator SALAZAR. This goes to another related question, and that

is one of the things that Ms. Olson testified to—her conclusion that

we do not have any sense of the quantum of the problem. The IRS

does not have any sense of how many people out there are victims

of identity theft. Do you have a sense of that, or does Ms. Stiff have

a sense of how big the problem is?

Commissioner SHULMAN. What Ms. Olson pointed out, correctly,

is identity theft is a rapidly emerging issue. The IRS has looked

at identity theft in relation to tax issues, so it had not been tracking this as identity theft, it had been saying, this is somebody who

is using somebody else’s Social Security number. I think we now

have heightened awareness about this and are starting to collect

information. In the past, we had not coded and tagged cases as

‘‘this is identity theft.’’ We coded them as ‘‘this is a double use of

a Social Security number,’’ which, in general, is identity theft. So

we are now starting and going forward to identify that.

Senator SALAZAR. Going forward. Commissioner Shulman, the reality is, we do not know how many victims of identity theft there

are with respect to the IRS today. So as you look, Commissioner

Shulman, at putting together the kind of fast-response team to provide relief to victims of identity theft, how are you going to size

that team to make sure that you are allocating the resources that

that team would need to be able to provide the hot-line, quick, effective human response to a victim of identity theft?

Commissioner SHULMAN. Well, right now what we will do is

make sure that we have a number of people trained enough to respond to our current sense of identity theft, and then you just do

some over-staffing so people will also be available—the over-staff—

to deal with other taxpayer issues if they come in. But they will

be 100-percent trained to deal with identity theft. So, I think there

are ways.

And one thing I have learned, because I have paid a lot of attention to how we are manning the phones for economic stimulus payments, is we have a very sophisticated ability to deploy people in

real time to answer phones around questions, and to adjust those
14

on a daily basis based on volume coming in. So we will train

enough people to deal with it. We will over-staff, but those people

will also be available for other issues in case identity theft claims

are not coming in.

Senator SALAZAR. So, if we call, when can we test your system?

Commissioner SHULMAN. This will be ready this fall.

Senator SALAZAR. So, this fall. September? October? Let us assume we are in Ms. Spencer’s client’s shoes. If we were to call, we

would be able to find that function up and running and effective

in September?

Commissioner SHULMAN. I will come back to you with a date. I

will tell you, I have been here 3 weeks. I sat down with the team.

I agree with you that we need time lines and deadlines. I pushed

the team, the same team that is doing all the calls around the

stimulus package. They promised me by this fall, and I will be able

to give you an exact date within a couple of weeks.

Senator SALAZAR. All right.

Again, to you, Commissioner Shulman. Ms. Spencer testified that

10 days—10 days is a long time of waiting, long nights—after her

client reported the theft of her identity to the IRS, the IRS released

the refund to the fraudulent filer. Ten days. It was only because

Ms. Spencer took the initiative to call the bank that the refund was

not sent to the identity thief, not because of anything the IRS had

done.

Can you tell me how that was allowed to happen, and why did

the IRS not immediately put a freeze on the refund after the taxpayer notified the IRS about the problem?

Commissioner SHULMAN. This is the first I have heard of this

case, and so I cannot comment on this specific case and how this

happened.

Senator SALAZAR. In general, if you had a case like this, why

would you not just immediately put a freeze on that refund to

avoid, if you will, the growing difficulty and the ultimate victimization?

Commissioner SHULMAN. I am going to ask Ms. Stiff to help me

on this one.

Ms. STIFF. We have a number of procedures in place to enable

us to process 200 million tax returns a year. What you are suggesting is something that will be part of what we are looking at

as we approach next year’s filing season, but our systems, as they

stand today, those refunds are going through in bulk. We do not

freeze every time there is an indication of a problem because the

bulk of these we research and satisfactorily resolve. So we are having to evolve our processes as identity theft grows, because maybe

the procedures we have in place are not adequate to be responsive

in a timely manner to the growing number of identity theft cases.

Senator SALAZAR. Ms. Olson and Mr. George, do you have a comment on that question?

Ms. OLSON. I think that I was speaking to my employees in Birmingham, in my Birmingham, AL office, and they told me of a

similar situation where they had received a call. They noticed that

the first refund was scheduled to go out, called the IRS, called

Criminal Investigation and asked them to freeze that refund, and

they said, we do not work identity theft cases. I think that if you
15

have this centralized unit that is trained, then you will be able to

develop systems that they will be able to look at and see if a refund

is scheduled to go out, and then we would have to develop the capacity to individually stop that refund. Or, if it is too far along in

the process——

Senator SALAZAR. You are the National Taxpayer Advocate. So

what Commissioner Shulman is attempting to do is to develop a

plan to address identity theft. You had six recommendations for

him. You are going on now with respect to one of those recommendations. Are you involved in helping them develop a comprehensive response to the identity theft issue that we are talking

about here today?

Ms. OLSON. I have been invited, and I have given them a name

on our staff to work with on this, and I have been informed that

my staff has not yet been involved in these proposals.

Senator SALAZAR. Why is that, Mr. Shulman?

Commissioner SHULMAN. As I told you, I have had the opportunity to sit down with Ms. Olson, now, twice in my 21⁄2 weeks

here, and I plan to involve her in these discussions. I have no

knowledge about staff-referred proposals. But we have been working hard on this, and we are committed. As I said, I view her as

a strategic asset in working with taxpayers.

Senator SALAZAR. I would imagine that, at the end of the day,

we are all on the same team here in terms of trying to avoid identity theft. So having all of those who have recommendations and

will have insight—whether it is Ms. Olson or Mr. George—involved

in putting together this plan to address the issue, would seem to

make sense.

Commissioner SHULMAN. Yes. You have no argument with me on

that, sir.

Senator SALAZAR. All right.

Mr. George?

Mr. GEORGE. I just simply want to say that I do not know whether this would have affected Ms. Spencer’s example, but the IRS has

a program called Questionable Refund Program that recently

changed its policies in terms of whether or not it would freeze the

refunds of tax returns that were questionable in the past, that had

a hint of impropriety. So, I believe that it is due to recommendations of Ms. Olson that that policy was changed. So I do not know

whether that is something that the IRS needs to revisit, but it

might again help in a situation such as what was described earlier.

Senator SALAZAR. All right. Thank you.

Ms. Spencer?

Ms. SPENCER. Well, one of the things that has frustrated me for

a long time as a return preparer in a large office is that when we

have these kind of issues, there is not a special mail stop at the

service center for us to send the paperwork to, along with the

proof, and have things expedited. There is absolutely nothing in the

system to do this. As far as this refund going out, I was told by

my State Taxpayer Advocate office, because I did ask, that it has

been turned over to Financial Management, and Financial Management cannot stop a refund. So, you have no window at all. It is

just, once it gets accepted by the IRS, that is the end of it. The case

is home free.
16

Senator SALAZAR. I appreciate that observation and your real-life

conclusion there, Ms. Spencer.

Commissioner Shulman, on dollars that the IRS sends out on erroneous refunds every year in identity theft cases, do we have a

quantification of how much that is?

Commissioner SHULMAN. I do not think we do. Could I make just

one comment on the last set of issues about refunds getting frozen,

going out, and just give you an observation that I have after 2

weeks on the job?

Senator SALAZAR. Sure.

Commissioner SHULMAN. We have this dueling tension that I

think Mr. George was referring to, which is, one, to make sure that

we protect the fisc in the National Treasury and bring in all the

dollars that we need and not send out any fraudulent refunds. Two

is to treat taxpayers well. So this issue has come up in other contexts already where there has been criticism of the IRS for holding

a refund if it did not have all the facts and circumstances and

someone was not given their due process rights. I think that is

what you were referring to, Mr. George, a change in policy to push

things out faster.

So these are issues that the Service grapples with every day: how

do you get refunds out very quickly to people and make sure you

are not getting them out to fraudulent people? It is just a tension

that our people are well aware of in trying to strike the right balance.

Senator SALAZAR. Let me ask you a series of questions that really

relate to the concept of trying to create some kind of an identity

theft crisis center within the IRS. If we had an identity theft crisis

center in the IRS, would that be helpful to address some of the

issues that have been raised by Ms. Spencer and Ms. Olson and

Mr. George? I do not understand, frankly, why the IRS cannot have

a one-stop office that can handle these kinds of cases. It seems to

me that, if you discover a victim of identity theft, people want to

know about that as soon as possible.

Yet, when I hear the description of what went on with Ms. Spencer’s client and what Ms. Olson had to say, first she went to the

IRS website and was told to file a complaint with the Federal

Trade Commission. They also were given the toll-free number from

the IRS. Yet, according to TIGTA, the IRS does nothing with the

FTC data. So this seems to me that we need a new mechanism, a

new organization that can be effective at addressing the victimization of identity theft victims.

So I guess I ask that as a question. I would like a comment from

you, Commissioner Shulman. But it just seems to me that this is

an opportunity for you as the new Commissioner of the IRS to look

at this in a comprehensive fashion that addresses many of the

issues and concerns that have been raised by our other witnesses

today, as well as by Chairman Baucus in his opening statement

this morning.

Commissioner SHULMAN. Yes. You have my commitment to look

at this in a comprehensive fashion. I also will tell you, I was heartened my first day on the job when Linda said, we do not think we

are far enough along, and we are working on it. Now I am going

to get the focus of the top people of the IRS, and I will commit to
17

the request that the chairman made, that in 90 days we will come

back with a comprehensive plan.

Senator SALAZAR. Let me ask a question of your coordination

from the IRS to Department of the Treasury and other law enforcement agencies. It is obvious to me that the Department of Justice

has a major set of issues with respect to identity theft. Is there a

coordination that occurs, Commissioner Shulman and Mr. George,

with respect to other agencies outside of the Department of Treasury whenever you have identity theft that you have identified occurring?

Mr. GEORGE. To some extent there is, Senator. The Department

of Justice has taken the lead in certain areas, but the Social Security Administration has an agreement, a memorandum of understanding, with the Department of the Treasury allowing for the exchange of certain information. It has to be noted, however, that

there is a provision within the Internal Revenue Code, section

6103, that places strict limitations on the types of information that

can be shared, which include criminal penalties if violated. So,

while this is a tax policy issue that the Commissioner would need

to discuss with the Assistant Secretary for Tax Policy at the Department of Treasury, there are ways to address the issue that you

are raising.

Senator SALAZAR. Ms. Spencer, you have had 30 years of experience working in this arena. At the very end of your testimony, you

said that you had some recommendations that you would make to

the IRS and to us in terms of how they address the identity theft

issue. Can you highlight what those recommendations are?

Ms. SPENCER. Well, first of all, I would like to say that I have

actually had more like 40. About 30 years ago, Senator Baucus, or

this committee, suggested that Social Security numbers be put on

tax returns for all dependents, and that had not previously been

done. They found out that first year that there were a lot of duplicate Marys and Johns and Dicks, and all those common names. I

cannot remember how many dependents fell off the tax rolls. It was

millions. Two million is the figure that stands in my mind. And the

IRS did not do anything with that Social Security information for

over 10 years, but those duplicate children fell off and stayed off.

When you think of making change, it often is, well, no, they cannot do that because they do not have the systems in place. But if

the rules are there, whether the systems are in place or not, I

think it helps to deter the thieves.

One of the things that I feel would be helpful would be to require

the W–2s to be sent in to Treasury—electronically, at least—before

the employees are given the W–2s, instead of 1 month later. Why

can these things not be at a certain time, and then not open the

e-file up to the general public until those W–2s have to be released? When people go to paid preparers now, if we are doing electronic filing, particularly, the Service is asking us to get picture ID

and copies of Social Security cards, and those things are not being

asked of these people who are using this Free File Alliance.

If, annually, the W–2s had to have something as simple as a twoletter code that you gave to each employer and then that was

matched so that you knew they had a new W–2 instead of last

year’s W–2, I think that might help to prevent people from using
18

that prior year’s W–2 to jump the gun on their filing, or to steal

a last year’s W–2.

Another thing. If people do their own filing on the Internet, if

they just had to scan W–2s into the software, or perhaps fax them

to a dead-end fax number, I believe that the dishonest would not

be quite so prone to add another digit to their withholding, or that

sort of thing. I mentioned about the electronic return originators

having a special mail stop to go to for problem returns. But another

thing that dropped off, and I am not sure if it was last year or the

year before, prior year adjusted gross income does not have to be

put on the return by self-prepared returns.

Senator SALAZAR. Ms. Spencer, I just was informed that a vote

has just started, so we have about 3 or 4 minutes here with the

hearing. But I want to just invite you to provide those recommendations both for this committee, as well as to Commissioner

Shulman, so that they can be considered as he revamps the effort.

Let me ask Ms. Olson just a question related to tax preparation

being outsourced to overseas locations. How big of a risk does that

create, and can you quickly sort of describe the risk and what it

is that the IRS ought to be doing with respect to this outsourcing?

Ms. OLSON. Well, this issue came up in talking about how preparers use or disclose the information that they receive from the

client. In the most recent years as accounting firms, both large, medium and small, have been outsourcing return preparation to

places overseas, many people have been raising questions: what

happens to that information once it is out of the country?

The Taxpayer Advocacy Panel, which is a Federal advisory committee chartered to advise the Commissioner, the Secretary, and

myself on taxpayer issues—and they are volunteer taxpayers, lay

people, generally, who make these recommendations—really made

this a primary concern of theirs, that they were very concerned

about this practice.

So the current Treasury regulation basically says that, if you are

sharing information overseas for return preparation, if you are

outsourcing, it does not ban the outsourcing itself because that is

a business practice, but that we want you to mask the SSN so that

in some way you do not link the financial information, the address,

to that all-important number which would allow you to essentially,

overseas, steal someone’s identity. The problem is, overseas our

laws do not reach.

Senator SALAZAR. Thank you, Ms. Olson.

Mr. George, how well does the IRS protect taxpayer data, and

what more should the IRS be doing to ensure that confidential taxpayer information is protected?

Mr. GEORGE. In all honesty, Senator, this answer would require

a lot more time than I think we have today. I have seen examples

recently, sir, where the IRS is using commercial vendors to transport sensitive tax data that is being misdelivered to people and

who are allowed to look at tax returns that they should not have

access to. The bottom line is, there is not a sufficient strategy within the IRS in terms of protecting the data. I am hopeful, hearing

what Commissioner Shulman has indicated today, that he is dedicated to addressing this issue.
19

I am committed to working with them, as I am certain that everyone else on this panel is. But not enough is being done. All you

need is a single laptop stolen which could contain tens of thousands

of taxpayers’ sensitive information, and that in and of itself could

cause a catastrophe to the lives of people involved.

Senator SALAZAR. We would appreciate your work on the plan

that Commissioner Shulman will put together for Chairman Baucus to make sure that your input is considered in that plan.

I would say a comment here in closing before I adjourn the hearing. It seems to me that one of the things, Commissioner Shulman,

you might want to consider as you put together this plan is an

identity theft crisis center, because I think for those who are victims of identity theft, they do end up being in a significant crisis

when they find out their identity has been stolen, or they find out

they are not going to be getting their tax refund. You want to be

able to provide them the kind of relief that we try to provide in the

criminal justice system, frankly, to people who have been the victims, in this case, of a crime.

Second of all, it seems to me that, given the nature of identity

theft, that this is an issue where we have many fingers of the government involved in trying to deal with identity theft in all of our

agencies, whether it is Homeland Security, whether it is other elements of Department of the Treasury. So there may be lots of assistance that you can get from some of the other Federal agencies

that are involved in this issue, and I would think that, for example,

the Department of Justice has a very significant interest in going

after and prosecuting those who are the criminals who are ultimately committing identity theft.

Let me thank you all as witnesses for coming before the Senate

Finance Committee and providing us with your testimony. We look

forward to working with all of you.

The hearing is adjourned.

[Whereupon, at 11:08 a.m., the hearing was concluded.]

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