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20–033—PDF 2016

S. HRG. 114–257 

PROTECTING TAXPAYERS FROM SCHEMES AND 

SCAMS DURING THE 2015 TAX FILING SEASON 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

MARCH 12, 2015 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

ORRIN G. HATCH, Utah, Chairman 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

DANIEL COATS, Indiana 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

MARK R. WARNER, Virginia 

CHRIS CAMPBELL, Staff Director 

JOSHUA SHEINKMAN, Democratic Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, Committee on 

Finance .................................................................................................................. 1 

Wyden, Hon. Ron, a U.S. Senator from Oregon .................................................... 2 

Coats, Hon. Daniel, a U.S. Senator from Indiana ................................................. 7 

WITNESSES 

Ciraolo, Caroline, Acting Assistant Attorney General, Tax Division, Department of Justice, Washington, DC ....................................................................... 4 

Camus, Timothy P., Deputy Inspector General for Investigations, Treasury 

Inspector General for Tax Administration, Department of the Treasury, 

Washington, DC ................................................................................................... 5 

Alley, Hon. Mike, Commissioner, Indiana Department of Revenue, Indianapolis, IN ................................................................................................................... 7 

Valentine, Hon. John L., Chairman, Utah State Tax Commission, Salt Lake 

City, UT ................................................................................................................ 10 

Klem, Ellen M., Director of Consumer Outreach and Education, Office of 

the Attorney General, Oregon Department of Justice, Salem, OR .................. 11 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Alley, Hon. Mike: 

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

Prepared statement .......................................................................................... 29 

Camus, Timothy P.: 

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

Prepared statement .......................................................................................... 36 

Ciraolo, Caroline: 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 42 

Coats, Hon. Daniel: 

Opening statement ........................................................................................... 7 

Hatch, Hon. Orrin G.: 

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

Prepared statement .......................................................................................... 44 

Klem, Ellen M.: 

Testimony .......................................................................................................... 11 

Prepared statement .......................................................................................... 44 

Valentine, Hon. John L.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 46 

Wyden, Hon. Ron: 

Opening statement ........................................................................................... 2 

Prepared statement .......................................................................................... 48 

COMMUNICATION

Operation HOPE ...................................................................................................... 51 

(III) 

(1) 

PROTECTING TAXPAYERS FROM SCHEMES 

AND SCAMS DURING THE 2015 

TAX FILING SEASON 

THURSDAY, MARCH 12, 2015 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:02 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Orrin G. Hatch 

(chairman of the committee) presiding. 

Present: Senators Grassley, Crapo, Thune, Isakson, Toomey, 

Coats, Heller, Scott, Wyden, Cantwell, Menendez, Carper, Cardin, 

Bennet, Casey, and Warner. 

Also present: Republican Staff: Kimberly Brandt, Chief Healthcare Investigative Counsel; Chris Armstrong, Deputy Chief Oversight Counsel; and Justin Coon, Detailee. Democratic Staff: Joshua 

Sheinkman, Staff Director; Tiffany Smith, Senior Tax Counsel; 

David Berick, Chief Investigator; and Daniel Goshorn, Investigator. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. 

SENATOR FROM UTAH, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

The committee meets today to hear about growing criminal activity that is targeting taxpayers across the country. These criminal 

acts are perpetrated by thieves hiding behind telephone lines and 

computers, preying on honest taxpayers and robbing the Treasury 

of tens of billions of dollars every year. 

This must stop, and we are here today to hear from some of the 

Federal and State officials on the front lines of the fight to catch 

these crooks and protect taxpayers. But first, I want to talk about 

one case in particular, and one very large number, by the way. 

This is a hearing that is long overdue, as far as I am concerned. 

We will get into it. I have to apologize, as Senator Wyden is not 

here yet, but he is coming. 

In this town, and especially right here on this committee, we 

often talk in terms of hundreds of millions, billions, or even trillions of dollars. Some joke about a number being referred to as 

‘‘budget dust,’’ even if that number has 9 or 10 zeroes behind it. 

But let me tell you about a number that is truly stunning: 

$15,800. Now, that $15,800 was saved through hard work, sacrifice, 

and honest living. That is $15,800 saved for the down payment on 

a new house for a growing family. That $15,800 in savings was 

2 

wiped away by criminals who used fear, confusion, and intimidation as their weapons. 

This is the story of the Degen family from Taylorsville, UT. I 

would like to play a news clip from KTVX, a Utah ABC affiliate, 

that tells their story. Can we do that? 

[Playing of video.] 

The CHAIRMAN. Well, that is just one family out of millions that 

have been targeted and thousands that have been victimized. This 

is just one scam. But make no mistake, taxpayers across the country are also facing identity theft in record numbers, account takeovers, and other criminal attacks. 

Once again, we have to stop this. Taxpayers must be more aware 

of the risks and better protected from attack, and these criminals 

must be found and brought to justice. I look forward to the testimony from our witnesses on today’s panel and to hearing more 

about how we can accomplish these goals. 

Now, let me turn over the time to Senator Wyden for his opening 

remarks. 

[The prepared statement of Chairman Hatch appears in the appendix.] 

OPENING STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON 

Senator WYDEN. Thank you very much, Chairman Hatch. I very 

much appreciate the opportunity to work on these issues in a bipartisan way. 

Colleagues, since the day that the IRS opened its doors, scam 

artists have been hatching up slick new ways of stealing taxpayer 

dollars from the Treasury. What is new is, the rip-off artists are 

now stealing Americans’ identities and personally threatening 

them on an industrial scale, while directly robbing them of their 

hard-earned money. The fraudsters are constantly dreaming up 

new tactics, and then they milk them for all they are worth before 

they start getting caught. Then it is lather, rinse, and repeat, onto 

the next scam, always one step ahead of the law. 

Today the committee will closely examine several of the fraudsters’ latest strategies that are plaguing taxpayers. The one that is 

hitting Oregonians hardest is the fake phone call demanding 

money or personal information on behalf of the IRS. In fact, these 

calls were the number-one consumer complaint registered with the 

Oregon Department of Justice just last year. Not everybody knows 

that the IRS simply does not cold-call individuals, making demands 

or threats. So it is pretty clear from my vantage point, there is a 

lot more work to be done to defeat this scourge. 

Given the sophistication of this criminal activity and the fact 

that a lot of it comes from overseas, this sure looks to me like an 

emerging type of organized crime. So the real question is, what is 

it going to take to root it out and get the bad actors on the sidelines—more prosecutions, stronger deterrence, more cops on the 

beat? What is the best way of getting the word out so that taxpayers are not tricked into surrendering their life’s savings to some 

intimidating voice on the other end of the phone line? 

But even if our people manage to avoid the phone calls, you can 

bet that the crooks find other ways to profit. Tax preparation softVerDate Mar 15 2010 15:52 May 11, 2016 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 R:\DOCS\20033.000 TIMD
3 

ware has become the scammers’ new fast lane. These sharks manage to acquire a taxpayer’s personal data from the black market or 

hack into commercial databases, and then they file false returns 

electronically. The victims may not find out until much later in the 

tax season, and by then it is just too late. Already there have been 

thousands of reports like this in 2015. As we will hear today, some 

software vendors are not doing enough to help prevent fraud. 

In my view, part of the challenge is getting the States’ Internet 

tax services and the IRS on the same wavelength. They have to 

communicate and work together to make sure that the criminals 

cannot just, in a nimble fashion, slide from one jurisdiction to the 

next as they rip off more unsuspecting Americans. 

Now, some taxpayers may choose to avoid software, but not even 

a paid tax preparer is guaranteed to be safe. In fact, many of them 

do not meet any standards for competence. There are far too many 

of these con artists out there willing and able to prey on the people 

who come through their doors. In some of the most offensive cases, 

they secretly falsify their victims’ returns to boost the refunds and 

then they pocket the difference. Once the tax season ends, the 

crooks disappear from the storefronts they occupied, and there is 

no trace of where they have gone. 

A few States, like mine, have rules in place to help shield the 

taxpayer from this kind of rip-off; most States do not. So Senator 

Cardin and I have introduced the Taxpayer Protection and Preparer Proficiency Act at the beginning of this Congress to give all 

Americans the security they deserve. Our colleague Senator Nelson 

is also a leader on this issue of keeping taxpayers safe from identity theft and fraud, and all of us wish, as I indicated to Chairman 

Hatch, to work on this in a bipartisan way. 

The bottom line is, there is no end to the ingenuity of the con 

artists, so my hope this morning is that we will get some fresh 

ideas for catching up to this wave of fraud and stopping it. Obviously, it cannot come soon enough. We have a distinguished panel 

here today. I am especially pleased that Ms. Ellen Klem, the Director of Consumer Outreach and Education in the Oregon Attorney 

General’s office, is here. My thanks to Ms. Klem, and to all our witnesses. 

Mr. Chairman, I look forward to working with you and our colleagues on this in a bipartisan way. 

The CHAIRMAN. Well, thank you, Senator Wyden. 

[The prepared statement of Senator Wyden appears in the appendix.] 

The CHAIRMAN. Our first witness today is Acting Assistant Attorney General Caroline Ciraolo of the Tax Division of the U.S. Department of Justice. Ms. Ciraolo was appointed Principal Deputy 

Assistant Attorney General and Deputy Assistant Attorney General 

of Planning and Policy of the Tax Division in January of this year. 

Prior to that, she was chair of the Tax and Litigation Group at 

Rosenberg, Martin, Greenberg in Baltimore. 

Ms. Ciraolo, we welcome you to the committee, and we look forward to hearing your testimony. 

4 

STATEMENT OF CAROLINE CIRAOLO, ACTING ASSISTANT ATTORNEY GENERAL, TAX DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, DC 

Ms. CIRAOLO. Thank you, Senator. 

Chairman Hatch, Ranking Member Wyden, and members of the 

committee, thank you for the opportunity to appear before you to 

discuss the Department of Justice’s efforts to combat identity theft 

and tax refund fraud. 

The Department greatly appreciates the commitment that this 

committee has brought to this very important issue. Combating the 

theft of personal information to file fraudulent tax refund claims is 

a top priority for both the Tax Division and U.S. Attorneys’ offices 

across the country. Your efforts to bring attention to this growing 

and insidious crime will help educate taxpayers about the importance of detecting and reporting identity theft and fraud. Today’s 

hearing also sends a strong message that the government is determined to identify and prosecute the individuals behind these 

schemes and, in doing so, will bring all its resources to bear. 

The Department’s Tax Division, which I had the honor and privilege of leading as Acting Assistant Attorney General, has one purpose: to enforce the Nation’s tax laws fully, fairly, and consistently 

through civil litigation and criminal prosecutions. Our close working relationships with IRS Criminal Investigation, TIGTA, the U.S. 

Postal Service, the FBI, the U.S. Attorneys’ offices, and other Federal, State, and local law enforcement partners, continue to enhance the government’s ability to respond quickly, efficiently, and 

forcefully to often-changing patterns of criminal conduct. 

Stolen identity refund fraud, or SIRF, is an example of this type 

of challenge. In SIRF crimes, offenders steal Social Security numbers and other personal information. They file tax returns early in 

the filing season, showing a false refund claim, and then have the 

refunds electronically deposited to a bank account, loaded on prepaid debit cards, or mailed to an address where the wrongdoer can 

access a check. 

SIRF crimes often involve multiple offenders at various levels in 

a conspiracy, and frequently involve employees with access to databases containing large volumes of personal information. SIRF 

crimes often hit the most vulnerable members of our society, like 

Melissa and Brendan Degen. These include, but are certainly not 

limited to, the elderly, the hospitalized, students, and members of 

our military deployed overseas. While the IRS will make good on 

any refund due to the taxpayer, there are inevitable burdens and 

delays while the matter is addressed, and the victims often experience a profound sense of violation. Moreover, we are all victimized 

by a loss to the U.S. Treasury. 

SIRF crimes require immediate action to prevent enormous harm 

to the American public. To this end, the Tax Division expedites its 

review procedures in SIRF cases, and has issued directive 144, 

which delegates to U.S. Attorneys’ offices, among other things, the 

authority to initiate tax-related grand jury investigations in SIRF 

matters and to charge those involved in SIRF crimes by complaint 

without prior authorization from the Tax Division. The collaborative efforts of the Tax Division and its law enforcement partners 

have strengthened the response to this crime. Through December 

5 

31, 2014, the Department prosecuted more than 1,400 individuals, 

and courts are imposing substantial sentences. 

To further leverage the information gained from each investigation, in February 2014, the Assistant Attorney General of the Tax 

Division created a SIRF Advisory Board, consisting of experienced 

SIRF prosecutors. The board works to develop and implement a national strategy to ensure consistent and effective nationwide enforcement and prosecution of SIRF crimes. 

For example, the board conducts training sessions for fraud analysts at the IRS Scheme Development Centers. The board provides 

training and resources to prosecutors across the country, and it 

works with U.S. Attorneys’ offices to develop local task forces. 

These initiatives enable prosecutors and law enforcement agencies to work together to identify schemes and to pursue the most 

culpable offenders while providing the IRS with real-time information that can be used to improve its filters and stop the issuance 

of fraudulent refunds. The prosecution of SIRF crimes is a national 

priority, and, together with our law enforcement partners, we will 

continue to look for the most effective ways to punish the offenders 

and bring this conduct to an end. 

Thank you again for this opportunity to provide the Department’s perspective on this issue, and I look forward to answering 

any questions you may have. 

The CHAIRMAN. Well, thank you so much. 

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

The CHAIRMAN. Our next witness is Timothy Camus, the Deputy 

Inspector General for Investigations at the Treasury Inspector General for Tax Administration, or TIGTA. Mr. Camus has served at 

TIGTA and TIGTA’s predecessor, the Internal Revenue Service’s 

Inspection Service, for over 23 years. He has a long career of having successfully investigated cases of domestic terrorism, bribery, 

and fraud affecting the IRS. 

We certainly welcome you, Mr. Camus, and we look forward to 

taking your testimony at this time. 

STATEMENT OF TIMOTHY P. CAMUS, DEPUTY INSPECTOR 

GENERAL FOR INVESTIGATIONS, TREASURY INSPECTOR 

GENERAL FOR TAX ADMINISTRATION, DEPARTMENT OF THE 

TREASURY, WASHINGTON, DC 

Mr. CAMUS. Thank you, Chairman Hatch, Ranking Member 

Wyden, and members of the committee. Thank you for the opportunity to testify on the topic of tax schemes and scams during the 

2015 filing season. 

By raising public awareness about criminals’ efforts to swindle 

honest Americans out of their money, we may prevent the next person from becoming a victim, which is a very good thing. Each year, 

the IRS compiles what it sees as the dirty dozen tax scams on its 

website. Many of these schemes peak during the filing season as 

people prepare their returns or utilize the service of paid preparers. 

My statement today briefly outlines the top schemes and scams 

currently affecting taxpayers, as they have proven to be surprisingly effective ways to steal money, in many cases before the victim 

even realizes they have been scammed. 

6 

The first scam is the phone impersonation scam, which landed on 

the top of the dirty dozen list this year. It is the largest and most 

pervasive impersonation scam that we are aware of, and it has 

claimed thousands of victims in every State represented on this 

committee. 

Here is how it works. The intended victim receives an unsolicited 

phone call from a person claiming to be an IRS agent. The caller, 

using a fake name, tells the victim a made-up badge number and 

claims that they owe tax and that they are criminally liable for 

some amount owed. The callers may even know the last four digits 

of the victim’s Social Security number. They then threaten the victim by stating if they fail to pay immediately, the victim will be 

arrested or face other criminal sanctions, such as losing their driver’s license. 

I myself received one of these calls at my home on a Saturday. 

TIGTA has received over 366,000 reports of these calls, averaging 

between 9,000 and 12,000 calls coming in to my agency each week. 

As of March 9, 2015, over 3,000 individuals have been victimized 

by this scam, by paying a total of $15.5 million, or an average of 

$5,000 per victim. 

The highest reported loss by one individual was a staggering 

$500,000, and in one particularly sad story, a member of this committee forwarded a letter to us from a constituent whose close relative suffered a tragic death after receiving harassing phone calls 

from these scammers. 

To help educate taxpayers, we are reaching out via the media in 

conjunction with the IRS and the Federal Trade Commission, as 

well as providing testimony to this committee, in hopes of eliminating this type of abuse and preventing other vulnerable individuals from becoming victimized. 

Another ongoing scam I would like to highlight involves using 

the story that the victim has won a lottery. This is a continuation 

of an old scam. It starts with an e-mail or a telephone call out of 

the blue declaring that the victim has won the lottery, but, in order 

to collect the winnings, they must first pay the tax to the IRS. The 

lottery scam often, but not always, originates from outside of the 

United States. In the end, the victims pay the money, but they 

never receive any lottery winnings. 

Just as serious as these scams is the risk of taxpayer refund 

identity theft. The IRS has made improvements in its identification 

of identity theft returns before fraudulent tax refunds are released, 

but continued attention is needed to effectively combat this crime. 

For example, the IRS still does not have timely access to thirdparty income and withholding information. Most of this third-party 

information is not received by the IRS until well after the taxpayers begin filing their returns. 

The deadline for most information returns with the IRS is March 

31st, yet taxpayers began filing their returns this year on January 

20th. This gap in time prevents the IRS from conducting validity 

checks. Of course, legislation would be needed to accelerate the filing of the information returns. 

The IRS has taken steps to effectively prevent the filing of identity theft tax returns by locking the tax accounts of deceased indiVerDate Mar 15 2010 15:52 May 11, 2016 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 R:\DOCS\20033.000 TIMD
7 

viduals to prevent others from filing a return using the departed’s 

name or Social Security number. 

For processing year 2014, the IRS rejected over 338,000 e-filed 

returns and stopped nearly 16,000 paper-filed returns through the 

use of these locks. Just 11 days after the filing season this year 

began, the IRS reported that it had prevented the issuance of more 

than $2 million in fraudulent refunds as a result of these filters. 

Other schemes such as prisoner fraud, unscrupulous tax preparers, and phishing scams are discussed in depth in my written 

testimony. Much work is being done on multiple fronts to address 

these criminal activities. We hope this work will reduce or eliminate their impact on taxpayers. 

Chairman Hatch, Ranking Member Wyden, thank you for the opportunity to share my views. I look forward to questions. 

The CHAIRMAN. Thank you so much. 

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

The CHAIRMAN. I am going to turn, briefly, to Senator Coats to 

introduce our next witness. 

OPENING STATEMENT OF HON. DANIEL COATS, 

A U.S. SENATOR FROM INDIANA 

Senator COATS. Mr. Chairman, thank you very much. I thank 

you for inviting our Indiana Department of Revenue Commissioner 

Mike Alley to testify today. 

Thanks to the leadership of our Governor Mike Pence and Commissioner Alley, our Department of Revenue developed a plan that 

stopped $88 million in attempted identity theft in the last filing 

season. This involved 78,000 fraudulent returns and 12 percent of 

all the refund dollars that were requested. The effort to do that, as Mr. Alley will explain, cost the State $8 million. The return on investment was $88 million. Compared with 

some of the things we do around here, which are usually the opposite—spend $88 and get $8—we spent $8 and got $88 back and 

saved a lot of taxpayers from this fraud, and we are currently 

bringing the needed savings to our State. 

Mr. Alley, Commissioner Alley, brings a wealth of private-sector 

experiences to his job. He has worked for decades in leadership positions in the banking industry. He is a CPA. He has started businesses, so he understands, first-hand, how important the customer 

service role is for the Department of Revenue. 

Again, Mr. Chairman, I thank you for inviting Commissioner 

Mike Alley to testify this morning and look forward to his testimony. 

The CHAIRMAN. Great. 

STATEMENT OF HON. MIKE ALLEY, COMMISSIONER, INDIANA 

DEPARTMENT OF REVENUE, INDIANAPOLIS, IN 

Commissioner ALLEY. Thank you, Senator Coats. 

Chairman Hatch, Ranking Member Wyden, and committee members, thank you for inviting me to discuss this important topic with 

you today. On behalf of Governor Pence and the citizens of Indiana, 

it truly is our honor to be here and share our story. 

I would like to share really three points with you today: the first, 

the nature of the problem and the overall breadth, which we have 

8 

already heard here today is significant; the steps that Indiana has 

taken and the lessons we have learned; and then recommendations 

to more fully and effectively address this epidemic problem. 

Tax refund fraud is one of the most lucrative platforms for criminals to monetize the value of stolen identity information, and the 

advent of electronic filing and processing has only enhanced the 

ability of criminals to utilize economies of scale in filing large volumes of fraudulent returns at nominal cost. 

As Senator Coats indicated, in 2014, 12 percent of the total refund dollars that were requested from Indiana were found to be 

fraudulent. Fortunately, we were able to stop them. They represented 78,000 fraudulent returns that we stopped that contained 

manufactured or stolen IDs, and again we saved the State $88 million in the process. 

It is still early in the 2015 filing season, but we are already seeing a dramatic increase in the use of valid IDs which have been 

stolen. With the increase of the reported successful hacks all across 

the United States of U.S. companies, we believe the availability of 

valid stolen IDs has never been greater, and the fraudsters have 

clearly upped their game, and we must do the same. 

Second, let me share with you what we have done here in Indiana. In 2012, we realized that we were suffering substantial losses 

from refund fraud. Accordingly, we worked with Governor Pence 

and his team to effectively identify a program that we could begin 

building. We knew that we needed to make significant systemic 

modifications, and we needed to do it before the next filing season. 

Our staff reached out to fellow States through the Federation of 

Tax Administrators and also our partners at the IRS, to see if 

there were some ideas we could borrow and implement rapidly. The 

response was very supportive, though we noted partial solutions 

and fragmented efforts across the group. 

With strong support from Governor Pence, we initiated a pilot 

program to screen all returns for suspicious identities. This program used LexisNexis®, a third-party commercial vendor, to screen 

returns and note identity theft information such as name, address, 

Social Security number, and other identifier information. 

We processed those returns. When they proved to be suspicious, 

we withheld those, and sent a confirmation letter to those taxpayers to have them confirm their identities. Again, this had a dramatic impact on our ability to recognize fraudulent identities and 

stop those refunds. 

The identity confirmation quiz is only a part of a larger process. 

It became very clear in the beginning that the Department would 

need to make some systemic changes by making significant investment in both staff and technology, and, further, we needed to 

change our approach to how we deal with fraud. 

For the 2015 filing season, we have continued to make enhancements. We have implemented some new pre-filter processing platforms that include a decision matrix that will allow us to better 

identify those valid IDs. We have also defined greater expectations 

from our certified software vendors as to the information they will 

provide to us and the level of fraud that they send our way. 

We are still battling this problem, but a few key lessons have 

been learned. First, it must be a strategic priority. Identity theft 

9 

and refund fraud are here to stay, and we have to address them. 

It requires a fiscal investment in leadership, staff, technology, and 

third-party resources. 

Second, collaboration. No one has all the answers, and we cannot 

solve this problem by ourselves. Sharing data, best practices, and 

experiences among all of the revenue agencies across the States, as 

well as the Federal Government and software vendors, is going to 

be important. Having access and ability to communicate on a timely basis is critical. We have to develop some targeted solutions. 

Fraudsters will continue to change their approaches, and we have 

to stay ahead. 

Finally, I would just note that the pre-paid debit card is an issue 

that I think needs to be addressed. It is a preferred tool of fraudsters in receiving their refunds. We found that over 50 percent of 

those returns with pre-paid debit cards are fraudulent. 

In terms of some recommendations on things we can do, we consider that the solution really encompasses a three-legged stool concept which notes that the States, the IRS, and software vendors 

each represent a significant and important leg of the stool. Each 

has unique data, perspectives, and capabilities that the system as 

a whole requires in order for us to make better decisions. 

The IRS is certainly in a great position to help us manage highly 

sophisticated fraud. States must work more collaboratively together. Finally, software vendors also have great information and 

can be helpful in sharing their intelligence. 

In conclusion, I just want to summarize that, first, this problem 

is here to stay, and we have to address it. Second, collaboration 

and sharing of information among the IRS and the States, reducing 

some of the barriers to our ability to share anonymous aggregate 

information, is critical. Third, we have to make the investments. As 

Senator Coats noted, we made an investment that yielded over a 

ten-times return, and I am confident providing that continued investment is the only way that we can get out ahead of this and 

beat it. 

On behalf of Governor Mike Pence and the citizens of Indiana, 

thank you for allowing us to share our story. I look forward to trying to answer any questions you may have, but thank you for allowing us to be here. 

The CHAIRMAN. Well, thank you. Thank you, Senator Coats and 

Commissioner Alley. We appreciate you making an effort to be 

here. 

[The prepared statement of Commissioner Alley appears in the 

appendix.] 

The CHAIRMAN. Now I am very pleased to introduce our next witness, Commission Chair John Valentine of the Utah State Tax 

Commission. Chairman Valentine was a member of the Utah State 

Senate, where he served with distinction from 1998 until his confirmation as Tax Commission Chair in September 2014. 

Prior to that, he was in the Utah House of Representatives, and 

was also an attorney in private practice. Chairman Valentine, we 

are really grateful that you have taken time out of your schedule 

to be with us today. I want to thank you for coming to Washington 

during the filing season and joining the hearing this morning. So, 

we appreciate all of you being here. 

10 

STATEMENT OF HON. JOHN L. VALENTINE, CHAIRMAN, 

UTAH STATE TAX COMMISSION, SALT LAKE CITY, UT 

Mr. VALENTINE. Thank you very much, Chairman Hatch and 

Ranking Member Wyden. Thank you also for giving us this time. 

Esteemed members of the committee, I am here to discuss ways 

to reduce the tax frauds that we are seeing envelop this country. 

There are four issues that you really ought to consider: (1) 

strengthening information sharing between the IRS and the States; 

(2) stricter regulation of the financial industry as it relates to prepaid debit cards; (3) regulating the practice of applying refunds to 

payment of fees for filing services, a practice sometimes called in 

the industry ‘‘refund transfers’’; and (4) requiring third-party filing 

services to tighten front-end security by using multi-factor authentication and other measures to secure data from unauthorized disclosure and identity theft. 

Prior to the commencement of the 2015 filing season, Utah installed a state-of-the-art computer software system to identify potentially fraudulent returns. On January 20th of this year, the 

Utah Tax Commission opened filing of income tax returns and deployed this system. As we began to process returns, our system 

started sending out error notices that indicated that there were 

fraudulent returns. 

We then followed up with verification letters of the suspicious returns to the taxpayers. Within 10 days after opening the filing season, we began receiving calls from taxpayers saying, ‘‘We have not 

filed our returns yet.’’ We initially thought that these were isolated 

incidents, but, as the week progressed, it was clear that they were 

not. 

We found several factors that were common in all of these calls: 

(1) the returns had the direct deposit information changed from the 

previous year’s bank account to a pre-paid debit card; (2) the returns contained routing and account numbers that differed between 

the Federal returns and the State returns; and (3) most of the returns appeared to have the exact 2013 return data populated in the 

2014 return. 

The next issue we found was common was that the address on 

the returns was the same as the address on the 2013 return, even 

when there was an error in the address. Finally, since most of the 

filings were made through one vendor, it appeared that something 

in their process was compromised. 

After communicating with that vendor and notifying other States 

of what we were finding, we talked with the Internal Revenue 

Service and said, ‘‘We think there may be a compromise of the 

MEF system,’’ that is the Modernized Electronic Filing system. 

The accounts in question that we were able to identify were immediately sent to the Ogden Service Center. Thirty-one returns in 

that first week were confirmed suspicious. We asked them in a 

phone conversation to confirm on their side. We are still waiting 

to hear from them. 

Many have asked what action was undertaken by the State of 

Utah when it discovered this attack. In short, we hurried. We 

stopped all refunds until we could get our arms around it. During 

that first week, we found five different fraud schemes, four of 

which were ones we had seen before—they are institutions, they 

11 

are preparers. But one was a new one, and the new one involved 

someone who had actual tax returns—not just identity theft, but 

tax returns from the prior year. 

Now, as we continued to prevent the outflow of fraudulent refunds, we found great difficulty in determining the nature of the 

financial institution and the account information. Specifically, we 

found that there was no uniformity in numbering to determine traditional debit cards from traditional bank accounts. In other words, 

we could not tell whether we were refunding to a pre-paid debit 

card or whether we were refunding to a legitimate bank account. 

There is an easy fix on this one. The easy fix is to require the financial industries to have identifier numbers in the routing number or in the account number to identify the account as a pre-paid 

debit card. We do that already with checking accounts and savings 

accounts; we do not do it with pre-paid debit cards. 

While we progressed through the investigation, we found a practice that enables fraudsters to perpetrate fraud without having 

anything at all at risk: the refund transfer. Here is how it works. 

The fraudster is allowed to deduct the third-party filing fees from 

the refund, the third-party filing fee gets paid, the fraudster receives the cash, and the State of Utah is out the money. 

Finally, we found third-party filing services often lack front-end 

identity security measures. Quality firewalls need to be installed by 

third-party vendors, both for the IRS and for the State Tax Commissions. 

Thank you, Mr. Chairman. Thank you, Ranking Member Wyden. 

The CHAIRMAN. Well, thank you. We appreciate your testimony. 

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

The CHAIRMAN. Finally, we welcome Ellen Klem from the Office 

of the Oregon Attorney General. Ms. Klem serves as the Director 

of Consumer Education and Outreach at the Attorney General’s Office and works to protect Oregonians from financial scams, including the types of scams and schemes we are talking about today. So 

we are happy to welcome you here as we have the others, and we 

look forward to taking your testimony. 

STATEMENT OF ELLEN M. KLEM, DIRECTOR OF CONSUMER 

OUTREACH AND EDUCATION, OFFICE OF THE ATTORNEY 

GENERAL, OREGON DEPARTMENT OF JUSTICE, SALEM, OR 

Ms. KLEM. Thank you, Chairman Hatch and Ranking Member 

Wyden. It is an honor to be here today and share my expertise and 

experience with you. 

Every day I hear stories from Oregonians about a wide variety 

of frauds and scams. Lately, these stories have focused almost exclusively on the IRS imposter scam. That is because, as Senator 

Wyden mentioned earlier, in 2014 this scam topped Oregon’s list of 

consumer complaints. Last year, we received more than 1,300, 

nearly twice the number as the next highest category. What is 

worse, these victims reported losses to us totaling more than 

$75,000, and we know from testimony presented here today that 

that number is just the tip of the iceberg. That is why I am here 

today to tell you the story of two of those victims and to talk a little 

12 

bit about what the Oregon Attorney General is doing to prevent 

this from happening to others. 

The first story is that of a woman I will refer to as Diane. In August of 2014, she lost $15,000 to an IRS imposter scam. This is the 

largest individual loss reported to the Oregon Department of Justice in 2014. Like many other victims, she received a message on 

her answering machine from a man claiming to be from the IRS, 

directing her to call him back at a phone number with a 202 area 

code. She returned the call, and the person who answered read her 

an affidavit for her arrest, threatened her with a fine of $25,000, 

18 months in prison, and told her she would be arrested later that 

day if she did not pay. Diane was terrified. She pleaded, she 

begged. The scammer said he could settle the matter, but only if 

she paid $15,000 by purchasing a series of pre-paid money cards. 

Diane made the only choice she thought she had. She complied 

with the request, and she was out $15,000. 

Individuals like Diane who send money to the scammers are not 

the only victims of imposter scams. In September of 2014, I was 

contacted by Marissa Phillips, a small business owner whose employee, Linda, had fallen victim to an imposter scam. After sending 

a very small amount of money to the scammers, Linda quickly realized she had been had and stopped answering her phone. But the 

scammers kept calling. When it was clear they were not going to 

get a hold of Linda at that phone number, they began calling 

Marissa’s small business, a business that provides in-home care 

services for seniors and persons with disabilities. When Marissa 

called me a few days later, she told me the scammers had called 

her business at a rate of 100 phone calls per minute for 20 minutes 

straight, and all of these calls prevented her from providing help 

to those who actually needed it, the seniors, their families, hospitals, doctors, and other staff. Ultimately, Marissa was forced to 

change her business’s phone number and all of its accompanying 

marketing materials. 

Thankfully, not everyone in Oregon who receives a phone call 

from an IRS imposter falls victim to the scam, and I would like to 

think that is because we have been working very hard to educate 

all Oregonians, especially our most vulnerable. The Oregon Attorney General has several educational tools aimed at scam prevention, because she and I both know that well-informed Oregonians 

are much more likely to recognize fraud and less likely to become 

victims if they are educated. 

We also know that these scams can be very hard to track and 

prosecute. The Oregon Attorney General also has invested in 

strong partnerships with Federal, State, and local governmental 

entities and officials, tribes, community organizations, advocacy 

groups, and members of the media. Through these partnerships, we 

are able to share complaints, coordinate investigations, and disseminate information to the public. Our partners give us a stronger 

voice to share information and keep Oregonians like Diane, Linda, 

and Marissa safe. 

This concludes my testimony. Again, thank you, Chairman 

Hatch, and thank you, Senator Wyden, for the opportunity to share 

these stories with you today. 

13 

The CHAIRMAN. Well, we want to thank you and all the witnesses 

here today. My gosh, I think a lot of people are going to be very 

surprised at how this is ballooning in our country. 

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

The CHAIRMAN. Let me turn to you, Commissioner Valentine. I 

want to thank you again for coming all the way back here to testify 

in the midst of filing season. I really applaud the innovative approaches that you are taking, that you and other State commissioners like Commissioner Alley are taking as well, to protect our 

taxpayers and to stop criminals. 

Now, in your testimony, you mentioned that you would like to 

strengthen information sharing between the IRS and the States. I 

would really appreciate it if you would elaborate a little bit more 

on that idea, just to explain what kind of information would be useful to you and what information you could provide to the IRS that 

would perhaps be useful to them. If you have any suggestions 

about how the Finance Committee could help facilitate the sharing 

of information, I would also like to have you comment on that, if 

you would care to. 

Mr. VALENTINE. Thank you, Mr. Chairman. There are actually a 

couple of places that are kind of rub points. Let me say this as the 

background though: we have a great working relationship with the 

IRS, especially the agents we deal with. The Memorandum of Understanding that we have with the Service allows us to share information. The trouble is, it is not being shared in real time. The information is very, very much delayed. Sometimes we are not getting the information that we could use in a timely fashion to be 

able to look at the returns as they are coming in. 

One of the things that the Senate Finance Committee may consider is the idea of moving up the filing deadline for the W–2s for 

employers. As I think Senator Wyden indicated, we have a problem. Right now, the W–2s go out to the individuals on the 31st, but 

we have a big gap, because the employers do not have to have them 

out until March 31st. So we have a 2-month gap. 

States are under a lot of pressure, as is the Federal Government, 

to make the refunds. This is the people’s money; they have overpaid it. Yet, we cannot give them the refund without knowing for 

certain that the right person is getting the refund. That gap is a 

big problem for us, and that one would help a lot. 

Another one is for the Senate and the House to be able to really 

encourage the IRS to have a more formalized sharing of information. I gave you the one example of the 31 returns we submitted 

6 weeks ago. They should be able to respond pretty quickly on 

something like that. We had identified them as fraudulent returns, 

we confirmed with the taxpayers that the returns had not even 

been filed, and yet we still cannot hear back in real time. Those 

are the kinds of things that I think could really help. 

The CHAIRMAN. Well, thank you very much. 

Mr. Camus, let me ask you this. I want to thank you and the Inspector General as well for all of your efforts to catch these criminals and educate the public about these types of scams. 

In my opening statement, I showed the video about the Degen 

family. The same criminals who targeted them are likely out there 

at this very minute targeting other Americans. Can you pledge to 

14 

me that your office is doing everything in its power to track them 

down and stop them? Can I have that commitment? 

Mr. CAMUS. Sir, you more than have that commitment. The men 

and women who work at the Treasury Inspector General for Tax 

Administration are working day and night on this crime, and we 

are partnering with other law enforcement agencies as well. It 

hurts us when these victims are victimized as described here. 

We instruct our agents that when they run into a victim or they 

hear from a victim who has actually lost money, we need to spend 

time with those victims, hear their stories, and attempt to get as 

much information as we can. We have a very aggressive, ongoing 

investigation at this time, and I would hope that in the very near 

future I could come and describe to you the successes of that investigation. 

The CHAIRMAN. That is great. Another scam that particularly 

worries me is the stolen identity refund fraud. A recent GAO report 

calculated that the IRS paid at least $5.8 billion of fraudulent refunds to identified thieves in 2013. Now, this type of fraud is usually not detected until the refund has already been issued. As a result, the government must attempt to recover funds that have already been disbursed to a criminal, which is no easy task. It would 

be better if we could detect more of this fraud before payments are 

made. 

Do you have any suggestions about how TIGTA and the IRS can 

detect this type of fraud earlier and stop fraudulent payments from 

going out the door? 

Mr. CAMUS. Well, as noted in opening statements by the witnesses and the committee members, one of the challenges is that 

criminals are out there watching the Internal Revenue Service. 

They realize that $3.1 trillion goes through the IRS on an annual 

basis, $374 billion in refunds. It is a very ripe target for them. So, 

as the IRS continues to try to advance its filters in response to new 

approaches to the fraud, the criminals change, because it is such 

a lucrative environment. 

Our audit staff continues to look at the filters that the IRS has 

in place and comment and recommend additional or improved filters. We have seen improvement in some of them, but it continues 

to be a major challenge to keep up with the criminal enterprises. 

The CHAIRMAN. Well, thank you. 

Senator Wyden, we will turn to you. 

Senator WYDEN. Thank you very much. This has been a superb 

panel, Mr. Chairman. Ms. Klem, thank you for the wonderful work 

that you are doing in our State, particularly for older people. I 

think you know, those are my roots with the Gray Panthers, so I 

am really glad that you are out there on that beat. It is incredibly 

important. 

I want to ask you, Mr. Camus, about this question of the foreign 

governments, because it seems to me—and you mentioned it in 

your testimony—it is clear that the phone scams, a lot of them, are 

originating overseas. It looks to me like this is essentially an 

emerging form of organized crime. You are conducting an investigation, and I recognize that there are some things you cannot say, 

but let us talk a little bit about some of the things that we ought 

to be looking at from a policy standpoint. 

15 

First, there is the question of whether we ought to be initiating 

efforts in terms of work with foreign governments and what they 

can do to assist with this. The second is, what is the appropriate 

role for local law enforcement, because you can go after the money 

runners who collect the payments. In other words, the rip-off artists are overseas, but they are going to need money runners to collect the payments. 

So let us start with those two, and there may be other opportunities. I know we have strike forces in terms of Medicaid, these interagency forces. But tell us a little bit—nothing that will compromise 

your investigation—about what we can be looking at that will give 

you more tools to fight particularly the rip-off artists who have 

done so much damage from overseas. 

Mr. CAMUS. Thank you so much for the opportunity. Of course, 

the challenge when we are dealing with these attacks being 

launched offshore is, first of all, getting our hands on these people. 

As you pointed out, Senator, the agreements or working relationships we would have with various foreign governments can create 

issues there, and we would ask for help with that. 

The problem we are seeing now is that, because there has been 

money paid, we are seeing other spin-offs of this crime. So, although we are focused and we think we know where it originated 

to start, we are now starting to see indications that other criminals 

have ripped off the original idea, and now they are launching these 

types of attacks. 

So it continues to be a challenge, but I think we are onto something. But it would certainly be something we could use some help 

with on down the road as far as getting our hands on a foreign national and bringing him to justice in the United States for a whitecollar crime. 

Senator WYDEN. Without compromising the investigation, can 

you tell us a little bit—you said there were some problems in working with the foreign governments. Can you just give us a little bit 

of a sense of what those are? 

Mr. CAMUS. Well, as you could imagine, in the world today, not 

all foreign governments would feel sorry for the United States, with 

our citizens and the integrity of our financial systems suffering 

these types of scams. It is one of the reasons my agency takes this 

crime so seriously, because it impugns the integrity of the Internal 

Revenue Service. So there are those out there who do not feel bad 

for the United States and are not necessarily interested in helping 

us bring these types of criminals to justice, sir. 

Senator WYDEN. Let us move on to the Anthem case, because 

this is one that really shows the industrial scale of these incredible 

rip-offs, something like 80 million people affected by cyber-ID theft. 

They are one of the biggest health insurers in the country. They 

have indicated now that 80 million Americans may have been 

hacked, opening the way to misuse of this data, certainly in terms 

of fraudulent health claims, but also this criminal enterprise we 

are talking about today with ID theft, including tax fraud. 

I have raised this question with the Inspector General in the 

past. It seems to me that blocking this type of tax fraud increasingly is going to fall on the shoulders of tax collectors, both the IRS 

and the States. So I would be interested in the panel’s recVerDate Mar 15 2010 15:52 May 11, 2016 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 R:\DOCS\20033.000 TIMD
16 

ommendations on what else we need to do to give you the tools to 

fight ID theft from cyber-attacks. So, any of you who would like to 

get into it—— 

I saw all the State officials already nodding their heads. Why 

don’t we hear from Indiana first, just to keep things in the center. 

I always like to get to the center before the far right and the far 

left go at it. [Laughter.] 

Commissioner ALLEY. Thank you, Senator Wyden. Well, in fact, 

anecdotally we are seeing a significant increase in the number of 

valid stolen IDs in Indiana, with Anthem being based in Indiana. 

So we already are seeing the impact of that. 

I think many of the steps that corporations all across the country 

are having to take involve more multi-faceted authentication in 

terms of accessing their systems. I think many companies have not 

invested adequately to prepare themselves for that and it will leave 

them vulnerable, so I think that is one key thing that corporate 

America, and all of us even at the governmental level, need to focus 

on. 

In terms of what we can do as a group, I think it goes back to 

that three-legged stool I spoke about earlier. It is making sure that 

we are sharing those information elements more readily and more 

rapidly. As Commissioner Valentine indicated, oftentimes we do get 

a great deal of information that we share with one another, but it 

is not on a timely basis. 

I would also really like to see the IRS take a greater leadership 

role in terms of driving many of the standards or expectations. We 

have 50 States, and many of them do have taxing mechanisms and 

Departments of Revenue all doing disparate things. If we could 

have the IRS help us to bring everybody together to establish a coordinated, collaborated set of standards and expectations from our 

software vendors, from financial institutions as well, I think that 

could do a great deal to bring everybody together on the same platform. 

Senator WYDEN. My time is up. That sounds too logical, so we 

will have to pursue it. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Thune, your turn. 

Senator THUNE. Thank you, Mr. Chairman. Thank you and 

Ranking Member Wyden for holding this important hearing. Thank 

you to our panelists for being here and for their willingness to testify. 

I think every taxpayer ought to feel confident knowing that their 

personal tax information is secure when they file it with the IRS 

and that there will not be a false return fraudulently filed in their 

name. 

I think we all know and have seen the devastating impact that 

tax-related identity theft can have on a family’s financial wellbeing, so I appreciate the committee’s interest in the subject, and 

I hope we are able to move legislation forward in Congress. 

One measure for preventing tax-related identity theft that has 

been recommended by a number of commentators is for the IRS to 

verify information from third parties, such as the Social Security 

Administration. I am wondering what your thoughts are about how 

much fraud that would prevent, and are there any potential downVerDate Mar 15 2010 15:52 May 11, 2016 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 R:\DOCS\20033.000 TIMD
17 

sides to that approach? I would just throw that open to anybody 

who would like to comment on that. 

Mr. Camus? 

Mr. CAMUS. Sir, thank you. Our auditors look at that on a regular basis, and they are in the middle of doing some audit work 

right now. But generally speaking—and Mr. Valentine pointed it 

out—the fact that the IRS does not have in its automated system 

a W–2, for example, to match at the same time the taxpayer files 

a return, that inhibits their ability to do a very simple validity 

check before issuing a refund. 

There is a great expectation to get the taxpayers a refund as 

soon as possible, because after all it is the taxpayer’s money. So 

anything that we can do to increase the timeliness or to get the 

time the taxpayer can start filing their return—which this year 

was January 20th—to jive with the time theSocial Security Administration has the W–2 information, which really is not due until 

March 31st, I think that would be a big help. 

Senator THUNE. All right. Does anybody else want to comment 

on that subject, or are there any downsides to that approach? 

Mr. VALENTINE. I am not aware of the downsides, other than the 

fact that there would be more information being transferred and 

places for it to be leaked out. 

But there are actually three areas that can really affect the fraud 

issues. The one is on the front end, which is the authentication 

issue, which is what you are speaking of. The next one is in the 

discovery phase, which is those transfers of information that occur 

back and forth between the various different tax agencies. The 

third one is the method that you use to pay. That is why the suggestions that I made really tried to affect all three of those. Any 

one of those is helpful, but you need to approach it, I think, in all 

three areas. If you do that, then you can really have a better 

chance of actually cutting the frauds down. 

Senator THUNE. All right. Thank you. 

It has been a number of years since Congress enacted a Taxpayers’ Bill of Rights. When a taxpayer has a fraudulent return 

filed in his name, is the recourse with the IRS sufficient? 

Mr. CAMUS. Again, our audit staff looks at that: what the victim 

experience is like when they contact the Internal Revenue Service, 

what type of service they get, and what the IRS does to help the 

taxpayer victim. We are continuing to look at that and audit and 

recommend changes or improvements in that program. 

Senator THUNE. And I was going to say, are there additional 

measures that ought to be considered to make it easier for individuals who find themselves in that situation to get the assistance 

that they need? 

Mr. CAMUS. Of course, it is a very traumatic issue for the victim. 

Anytime anybody’s identity has been compromised, they are very, 

very upset. Again, I am not ready to comment on where we are and 

what we are doing, but I do understand from our auditors that 

there has been improvement, and they continue to work and look 

to make that experience better for the victim. 

Mr. VALENTINE. Senator, I can tell you, in the State of Utah we 

have a Taxpayer Services Division which focuses exactly on the 

issue that you are raising, and that is, when someone claims that 

18 

they have a fraudulent return, they have to have a way to be able 

to process it quickly without having to go through the whole State 

bureaucracy. 

We have done that with our Taxpayer Services Division in a quiz 

letter that we send out to be able to authenticate that the person 

who is calling us is in fact the right person. That kind of thing may 

be something the Service could consider as well, to really have a 

way to expedite a particular complaint of identity theft. 

Senator THUNE. Just very quickly, there have been recent 

breaches involving TurboTax that have made national news. Is 

there a reason why TurboTax has experienced this but other electronic providers of tax service have not? How preventable is this? 

Commissioner ALLEY. I am not so sure that others have not also 

been impacted. I think perhaps we have realized it and directly 

identified the particular breaches that occurred with the one vendor—which they have taken additional steps to try to mitigate— 

but I think we are finding in Indiana that it is not just TurboTax 

that has been impacted by this. I think the fraudsters are moving. 

I mean, they move with great agility. As they impact one and have 

success and those doors close, then they readily move to another 

open door. So I think it is a systemic issue and really broad across 

the entire industry, not limited to any particular vendor or party. 

Senator THUNE. Thank you. Thank you, Mr. Chairman. Thank 

you all very much. 

The CHAIRMAN. Senator Warner? 

Senator WARNER. Well, thank you, Mr. Chairman. Thank you for 

holding this hearing. We all have stories from our constituents. We 

hear the same kind of stories in Virginia. 

Mr. Chairman, one of the things that I think we could do that 

comes to my attention is—Senator Ron Johnson and I have some 

legislation on this—the IRS currently interprets the law as saying 

that if they find out that you have been the victim of identity 

fraud, they do not even have to tell you as a citizen that you are 

the victim of that fraud. They do not have to notify law enforcement. So, on the notion of whether I believe they could do it administratively, we have written to them. 

Perhaps you and the ranking member writing them might shake 

them up a little bit more. But if we cannot get at it administratively, one step that we could take would be making sure that the 

IRS is actually a partner in this effort in identification. When it 

comes to their attention that somebody has been a victim of identity theft, we notify the victim and law enforcement. I think we see 

some nods from the panel there. Again, the numbers are huge, as 

you pointed out in your testimony: $5.8 billion in 2013. 

A second item that I think we ought to consider is—and this is 

something I have been working on in the Banking Committee; I 

know Senator Carper walked in briefly—some level of mandatory 

data breach reporting. It is a very gray and developing area. 

When, particularly on the retail side, we have a data breach— 

we have seen countless indications of data breach, but there is no 

obligation, there is no standard yet, about when a company needs 

to report this information. I think there needs to be such a standard. 

19 

One of the things we have urged from the Banking Committee 

side is that—this is an area where there is a lot of finger-pointing 

between the retail sector and the financial sector, and rather than 

creating another interchange battle, we should try to have the financial sector and the retail sector actually collaborate better. I am 

going to get to a question here. 

It would seem to me as well, and one thing that I would like the 

panel’s comments on is, is there not a way, either through the IRS 

or in collaboration with the private providers, the TurboTaxes—I 

agree with the panel’s comments that this is not just a TurboTax 

problem, this is not something that can be simply solved by governmental entities. We need the private sector, which has a very vibrant business, as all. 

Why have we not created a single easy-to-use portal so that, for 

Mrs. Smith or the lady from the story in Utah, there is a single 

place where you can at least check whether this is a real claim or 

not? I mean, do you all want to speak to that notion of how we do 

a better job of consumer education and why we have not had the 

IRS more active in having, perhaps in collaboration with State tax 

departments and others, an easy-to-find site? And frankly, what 

would be the responsibility as well of the private-sector providers, 

the TurboTaxes and others, to collaborate with that one single portal? 

Mr. VALENTINE. With the remaining time left, there are two 

issues that you are really raising. One is the notification issue, and 

the second one is, how does the taxpayer easily check to see if their 

return has been filed? Utah actually tried to address both of those 

issues by having a real-time notification that we believe your return has been hacked or that your return has been filed. We actually tell them. 

Senator WARNER. Unlike the IRS. 

Mr. VALENTINE. We do not have the impediments that the IRS 

has in that regard. 

The second one is that we have an easy system now for taxpayers to check whether a return has been filed or not. We call it 

our Taxpayer Access Point or TAP system. You go to our Tax Commission website and you fill out the authentication issues. 

Once you have done that, you can determine whether your return 

has been filed. So we have been doing public service announcements saying, please check to see if your return has been filed. If 

your return has been filed and you have not filed it, here is the 

number to call. 

Senator WARNER. Well, would it not be potentially better to have 

some national education process here since, again, the disproportionate amount of the fraud is taking place at the Federal level 

rather than the State level? 

Mr. VALENTINE. I would agree. 

Senator WARNER. Commissioner, do you want to—— 

Commissioner ALLEY. Yes, I would agree as well. It is just a matter of finding the resources and the funding and getting all the 

players collaborating with one another at the same time. But I 

think it represents an ideal scenario that should be played out, and 

we need to strive toward that. We just have to get it started, and 

we have to have the leadership. 

20 

Senator WARNER. I know my time is up, Mr. Chairman, but I 

would simply say that when we are looking at $5.8 billion in 

fraud—the Washington Post says this year we have seen a 37-fold, 

37 times increase in potentially fraudulent claims—the ability to 

have a little bit of resources to have that common site, number one, 

and two, either by administrative change or legislative change, 

making sure the IRS actually informs people when they know they 

have been the victim of identity theft, I think would be steps in the 

right direction. 

Thank you. 

The CHAIRMAN. Well, thank you so much, Senator. 

I might add that Senator Grassley is chairman of the Judiciary 

Committee, and he asked that I ask this question of you, Mr. 

Camus, and then we will turn to one of the other Senators. 

On behalf of Senator Grassley, the Treasury Inspector General 

for Tax Administration, or TIGTA, has detailed how IRS needs to 

do more to reduce improper payments for the Earned Income Tax 

Credit and the Child Tax Credit. For 2013, about $14.5 billion in 

improper EITC payments were made, and between $5.9 billion and 

$7.1 billion for the Child Tax Credit. 

Now, both of these credits pay cash benefits for exceeding any 

tax paid, making them a prime target for anyone looking to engage 

in tax scams or ID fraud. At the same time, the rules governing 

both these credits are complex, opening them to innocent human 

error. 

So the question is this, Mr. Camus. In your opinion, what 

amount of improper payments would you attribute to fraud versus 

innocent taxpayer error, and do you suspect that at least a significant amount of improper payments are the result of fraud? 

Mr. CAMUS. Well, it is clear that the fraudsters, as we pointed 

out today, look for any opportunity whatsoever to get at money, 

and they are ruthless in their attempts. The fact that they would 

use credits that are legally available to folks filing tax returns is 

not a foreign concept. I just do not have that information available, 

but I would be happy to meet with my audit staff and try to get 

a response to Senator Grassley. 

The CHAIRMAN. If you would, I would like to have that response 

as well. 

Mr. CAMUS. Yes, sir. 

The CHAIRMAN. Well, thank you. 

Senator Isakson? 

Senator ISAKSON. Thank you, Mr. Chairman, Ranking Member 

Wyden. I appreciate the opportunity. 

Ms. Klem, last week I returned home to Atlanta from a week in 

Washington, and when I walked in the back door, my wife—whose 

name, by the way, is Diane—said, ‘‘You need to listen to the voice 

mail I saved from the telephone this week.’’ 

It was precisely the call you talked about, where a woman with 

a very convincing voice informed me that the IRS had determined 

I owed them a substantial amount of money and that I should call 

a 202 number as quickly as I could or they would file suit next 

week. Fortunately, being a member of this committee, I realized 

that probably was not true. But the next morning, ironically, I was 

21 

doing a free-file event with the director of the IRS in the Atlanta 

region and gave him the telephone number to follow up on. 

When I gave him that number, he said, ‘‘Well, this cannot be 

real, because we do not make any solicitation by telephone; every 

one is in the mail.’’ I thought to myself, ‘‘I should know that,’’ but 

the American public ought to know that as well. 

So it would seem like there would be more ombudsmanship on 

behalf of the IRS, and maybe even the IG or the Treasury, to let 

taxpayers know that there are no enforcements by phone, they are 

all done by mail, because that is a real problem, and it was a very 

convincing phone call. 

Ms. KLEM. Yes. Thank you, Senator. It is very common, and it 

is very upsetting when that call comes in. That is precisely why 

this scam is so successful. We do have partnerships on a local level 

with our counterparts at FTC, the IRS, and others, and we do 

share information like this infographic that is in front of me right 

now, which is a really great infographic—I am happy to share it 

with the committee—about the IRS imposter scam. 

It says: ‘‘Warning Signs: How Will the IRS First Contact You? By 

Phone? No. Email? No. By Mail? Yes.’’ It is very clear to see, but 

this is not widely disseminated, and so we need to do a better job 

of getting that into the hands of the general public. 

Senator ISAKSON. That is the point I wanted to make. If the 

chairman would listen, or Ron Wyden would listen for a second, I 

want to make a point. One of our problems is, we do not have a 

game plan or a point man to get the consumer information out 

there, and that has been said by a number of you. We have a department that was created by the administration called the Consumer Finance Protection Bureau, which is in the business of protecting consumers. 

It would seem like Secretary of Treasury Lew would contact 

Richard Cordray and this would be a perfect way for them to use 

their investigatory and solicitation arm that tries to help people 

who are victims of business fraud, to protect them from tax fraud 

as well. I think that is something that Treasury could do. 

Mr. CAMUS. Yes, sir, Mr. Isakson. As a matter of fact, we have 

touched base with the Consumer Finance Protection Bureau, so we 

are going to include them. The majority of our focus has really been 

with the Federal Trade Commission and the IRS. The IRS has been 

putting out YouTube videos, and I myself have been interviewed. 

I will take any television interview that is put in front of me, not 

because I am a ham, but because I believe in my heart that if we 

protect one taxpayer from having these horrific stories, that is a 

good day for us. I am so happy about this hearing because I am 

hoping that this will also help get the word out that when you get 

those calls, please hang up the telephone. But I really, really appreciate it, and we are trying to work with that bureau. 

Senator ISAKSON. And I hope Director Cordray will be as aggressive on protecting people from tax fraud as he is from other frauds 

in society. 

Ms. Ciraolo, I represent Georgia, where Ft. Benning is located. 

I noticed in your testimony that a member of the medical team at 

Ft. Benning stole the information and identification of a number of 

22 

soldiers at Ft. Benning, and tax fraud was perpetrated against 

them. 

Did you coordinate with the Department of Defense once that 

was determined to try to get the word out to DoD that they need 

to watch out for those who would take advantage of their position 

with the government to steal the identity of our soldiers? 

Ms. CIRAOLO. Senator Isakson, thank you for that question. I 

joined the Department 2 months ago, so I was not involved in those 

types of discussions. I do not have that information with me today, 

but I can certainly report back on what efforts were made with the 

Department of Defense. We certainly take seriously any allegations 

and efforts by offenders to commit these offenses, and we are particularly focused on the vulnerable victims of our society, including 

our military members. 

Senator ISAKSON. Well, as chairman of the Veterans’ Affairs 

Committee, I am going to take the initiative to do the same thing 

too, so, if you would do that with DoD leadership, I will do it with 

Veterans’ Affairs leadership as well. 

Ms. CIRAOLO. Of course. 

Senator ISAKSON. My last point is this. Each of the State Directors made a comment about information sharing, if I am not mistaken, and that would be a key to stopping this. One of the problems that exist is the U.S. Senate and House have not done a 

cyber-security bill, and, in the pending bill that we hope will be before us soon, there are provisions for idea sharing and exemptions 

from the anti-trust laws, so information can flow to the government 

to enforce against tax fraud and things of that nature that are used 

by cyber-security. 

So I would hope we will get the message that we are part of the 

problem. Our cyber-laws are way out of date with our cybercriminals, and the quicker we in Congress act on that legislation, 

the more taxpayers will be safe from fraud. That is my only editorial comment. 

The CHAIRMAN. Well, thank you, Senator. 

Senator Casey, you are next. 

Senator CASEY. Mr. Chairman, thanks very much. I appreciate 

the hearing and want to thank the witnesses for your testimony, 

your presence, and your commitment to stopping this crime. 

I am struck by what I have seen in Pennsylvania. I am sure this 

could be replicated in many States, but I am just looking at a small 

sampling of headlines. This is from a television station in Erie, way 

up in the northwest corner of our State. The title of the news article about which they were reporting was, ‘‘IRS Phone Scams Ramp 

Up in Erie.’’ Then we go to the other end of the State, literally, the 

Lehigh Valley over by the eastern border of our State: ‘‘IRS Scam, 

Widespread in Pennsylvania, Reported in Lehigh Valley.’’ Then, in 

my home area of northeastern Pennsylvania: ‘‘IRS Phone Scam 

Reaching More in Northeastern Pennsylvania.’’ So this is, again, a 

lot of what you have heard and a lot of what you have had direct 

experience with trying to stop. 

I would start with Assistant Attorney General Ciraolo. I have a 

particular question about your assessment of kind of where we are 

in light of what I have seen, and what I am sure others have seen. 

I was in Berks County, which is on the eastern side of our State, 

23 

a number of months ago with the District Attorney, John Adams. 

Mr. Adams was kind of walking through some of the basic challenges from a prosecutorial standpoint. 

He emphasized, among other things, that the perpetrators are, 

first, highly organized, and two, often reside in jurisdictions far 

away from the victims, and also beyond the reach of local authorities. And he even pointed to, as you have all seen, I am sure, perpetrators residing in foreign countries. So those are among the 

many challenges that much of your testimonies pointed to. 

I do not want to be pessimistic, because I do want to get to the 

part of your testimony where you talk about what has been happening with the Justice Department and some of the success you 

have had, but there is, I think, a sense, because of the scope and 

gravity of the problem, that we are not winning. I want to just, 

from a national perspective, ask you, how would you assess the war 

or the battle? 

Ms. CIRAOLO. Thank you, Senator Casey. The Tax Division has 

a dual role in these matters. We prosecute the offenders, and, in 

doing so, we hope to change the calculus for would-be offenders 

with the substantial sentences that we are receiving, and we are 

receiving substantial and increasing sentences. 

In addition, we share information we obtain from these cases in 

real time with the IRS which, it is our understanding, is working 

very hard to improve its filters to better identify fraudulent returns 

and to prevent the issuance of fraudulent refunds. So that is the 

Tax Division’s role. These cases certainly present unique challenges, and we will continue to devote our available resources in 

this area. 

Senator CASEY. And I guess I would ask, starting with you and 

going down with your colleague from Treasury and others, and I 

know much of what you might say in the short answer—and it has 

to be short because of the time—is already imbedded in your testimony. But if you had to itemize one, two, or three action items that 

we could work on, resources or other tools that you need to do your 

job—and I am sure others who may not be in the Federal Government but play a role in this—what do you hope we would do by 

way of authority or authorization or by way of appropriation? 

Ms. CIRAOLO. Senator, I think that holding hearings like we are 

having today is critical to getting the word out to the American 

public—our elected representatives taking the message back to 

their home States and making sure the information is out there as 

often and as loudly as possible. 

Many of these scams can be stopped if the American public is 

educated, and having a centralized location for that information, I 

think, is a wonderful idea. I am very happy to see the representatives here on the panel from across the country. It gives me hope 

that we will see further information in the future. 

Senator CASEY. Thank you. I would maybe ask each of the remaining witnesses to do a 15-second, ‘‘What should Congress do?’’ 

Mr. CAMUS. I echo what my colleague said. From a standard lawenforcement point of view, the scam is so simple. We will never be 

able to prevent somebody from picking up the phone claiming to be 

another person and demanding money. It is public awareness at 

the top of it. When the money dries up, the criminals will go away. 

24 

But getting our hands on them, and bringing them to justice in the 

historic way, is one of the things we want to do because we want 

people to pay for this, but it is not a solution to the crime. It is 

people hanging up the telephone and not being victimized. 

Commissioner ALLEY. The criminals are going to continue to be 

very agile, so, as we close one hole, they will open a new one. But 

I think the greatest thing we can do is to ensure and require greater collaboration among all the groups, as well as provide some 

funding to ensure that that collaboration can take place. 

Senator CASEY. Commissioner, thank you. 

Mr. VALENTINE. A final comment is that you still have to be able 

to cut off the vector that is used to be able to receive the money, 

and I think the identification of it is something Congress can require the financial industry to do, to say, you know what? We just 

have to know that this series is going to be a pre-paid debit card. 

We will not refund it that way, we will refund it by a check at that 

point. 

Senator CASEY. Thank you. 

Ms. KLEM. And, Senator, I would echo the comments about education and raising awareness around the issue. I travel the State 

every day and speak to mostly older adults about this fraud, and 

it is just devastating to hear their stories. Frequently after they 

have shared them with me they say, gosh, I wish I had talked to 

you last week. So, if we can get more awareness, more education, 

more media spotlight, that would be great. 

Senator CASEY. Thank you very much. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Well, thank you. 

Senator Cantwell, you are next. 

Senator CANTWELL. Thank you, Mr. Chairman. I would like to 

join my colleagues who have been bringing up these issues about 

identity theft and fraud, but specifically to point out that the 111th 

Congress increased the IRS’s responsibility while decreasing the 

funding, so the IRS is now responsible for implementing the Foreign Account Tax Compliance Act, and the program is in effect for 

calendar year 2015. 

So, in addition to the additional required legal tasks lawmakers 

will have, the IRS is being urged here—which we really want you 

to do to combat identity theft—to reduce errors in Federal tax programs and generally reduce tax fraud. So I just think we need to 

take this into consideration as it relates to the budget this year 

and make sure that the resources are there to do this. 

I am concerned that taxpayers will ultimately—we need to get a 

handle on what has been happening with identity theft. It was 

found that the IRS closed 22 percent of the identity theft cases 

without taking the appropriate steps to fully resolve the victim’s 

account. 

So, examples include victims not receiving refunds, or IRS failing 

to update the victim’s address so they could receive an Identity 

Protection Personal Identification Number. During fiscal year 2014, 

nearly 270,000 identity theft returns of this type were closed, so, 

if that reported rate, 22 percent, is accurate, about 60,000 taxpayers were burdened by having their cases closed in a premature 

fashion. 

25 

So what do we need to do to fix that? 

Mr. CAMUS. That is a job that would fit in our audit staff’s portfolio. When they look and see how the IRS is doing with their identity theft program, one of the things I always look at is the victim 

interface and how the IRS is processing the claims and the correspondence. I know that the auditors are doing work in that area 

as we speak. 

Senator CANTWELL. But will we have this resolved for this tax 

season so we are not prematurely closing cases? 

Mr. CAMUS. Unfortunately, it is always in hindsight, in the rear 

view mirror that the audit team looks at the work that was done 

in a particular filing year, because they need to wait until the cases 

are closed before they can look back and see how they were handled. So I will share the sentiment. 

Senator CANTWELL. Anybody else? Do you, Mr. Alley, or does 

anybody else have any thoughts about this? I mean, we need to do 

something better than to have these taxpayers affected this way. 

Commissioner ALLEY. I agree. I mean, it creates a tremendous 

amount of anxiety among the taxpayers. I mean, we also have Taxpayer Administration Services to work with our taxpayers who 

have been compromised with their identities to ensure that they receive the comfort and knowledge that their return has been properly reflected in their account and properly accounted for. We need 

to do the same thing at all levels. 

Senator CANTWELL. Well, Mr. Chairman, I know that practically 

every committee has been asked to address the ideas of cybersecurity and move forward, and I think our committee should certainly look at this particular aspect of making sure that our tax filers are also secure as well. So, thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Cantwell. 

Senator Wyden has another question. 

Senator WYDEN. Thank you, Mr. Chairman. I just did not want 

to wrap up without giving you a chance, Ms. Klem, to talk about 

seniors, because I think we know how outrageous it is that seniors 

get ripped off this way. I mean, we have millions of older people 

in this country who are walking an economic tightrope every single 

day. They balance their food bill against their fuel bill, their fuel 

bill against housing costs. 

They get ripped off this way, and it is not some abstraction. They 

really suffer. So, as we wrap up, I just wanted to finish with this. 

What else do you think this committee can do to help beef up the 

fight to protect seniors from these kind of rip-offs? 

Ms. KLEM. Senator Wyden, that is a great question. It is true 

that this particular imposter scam disproportionately affects vulnerable adults, especially older adults. They are home during the 

day; they answer their phones. That is because they grew up in a 

time where they were taught that it is rude not to answer the 

phone and listen to the caller on the other end. 

So I think some of the suggestions we have heard today are wonderful, but I am going to keep beating the drum of education and 

awareness. I think that that is really key. I think if we can let people know that this is a notoriously awful scam and that they 

should be alert to it and it is not rude to hang up the phone, in 

26 

this particular case, I think that is a wonderful educational tool for 

people, especially older adults. It is very tough. I talk to them 

every day. 

It is going to be a struggle, but I think the more information and 

awareness we can get out there, the better. I always tell people 

who come to my presentations or call me on the phone to share 

their stories with one or two other people, because I think that personal story, that personal touch from somebody who maybe got that 

phone call and almost fell victim or did fall victim, letting others 

know, is important. 

Senator WYDEN. Thanks for the good work you are doing. 

Ms. KLEM. Thank you. 

Senator WYDEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Well, thank you, Senator. 

Senator Menendez? 

Senator MENENDEZ. Thank you, Mr. Chairman. To all of our witnesses, thank you for your testimony. 

As many have noted, identity theft and tax schemes are some of 

the fastest-growing crimes in the United States. Not only do the 

victims, who are disproportionately low-income and vulnerable populations, lose millions of dollars to these schemes each year, they 

are also subject to, as Ms. Ciraolo noted in her testimony, months, 

if not years, of overwhelming paperwork, credit problems, and inconvenience. 

One constituent of mine, whom I will just refer to as Sandra, experienced this nightmare firsthand. She contacted my office in 

March of 2013 to request help in order to restore her identity, 

which had been stolen in 2010. She did not receive her tax refunds 

for 2010, 2011, and 2012 and was getting nowhere with the IRS 

over fixing this situation. 

Finally, after an additional 2 years—2 years—of working with 

her, the IRS, and the Taxpayer Advocate’s Office, we were finally 

able to resolve the situation earlier this year. So, Mr. Camus, is the 

IRS doing enough to resolve cases of identity theft in a timely manner? Is the 4- to 5-year waiting period that Sandra experienced acceptable, in your view? 

Mr. CAMUS. In my personal view, no, because I am a criminal investigator, and I know how horrific that type of an experience is 

for an individual. But I can tell you, based on the audit work that 

I have read done by my agency, that the IRS has made great 

strides in trying to be better, faster, and more responsive to the 

victims. 

One of the things that they put in place was an identity theft victim PIN that, in the future years when the taxpayer files, they use 

to help validate their identity. I understand they are not always 

100-percent on that either, but my observation from reading the 

audit reports that the audit staff has done is that they are making 

great strides and they are endeavoring to improve. 

Senator MENENDEZ. What would you say is the status now of 

somebody who finds themselves in a situation like Sandra? What 

would they reasonably expect to be the period of time that their 

issue would be resolved? 

27 

Mr. CAMUS. My understanding is that it would be much better 

than it was in 2010, 2011, and 2012. But whether or not it is up 

to par—— 

Senator MENENDEZ. Four to 5 years was her experience, so better 

is a relative question. What would you say? What is the average: 

a year, 2 years? 

Mr. CAMUS. Yes, sir. I wish I had that information available, but 

I do not. 

Senator MENENDEZ. Well, I would love to get it from the IRS at 

the end of the day. 

Let me ask this. Commissioner Koskinen testified before this 

committee in February about the issue of unscrupulous tax preparers. In responding to a question I raised, he said, ‘‘The IRS is 

very concerned about unscrupulous taxpayers’’ and that there is ‘‘a 

percentage who are crooks, and then there are ones who are a 

major part of the problem of fraud across the board.’’ 

Now, I know the IRS tried to regulate paid taxpayers a few years 

ago and was rebuffed by the D.C. Circuit Court of Appeals, which 

argued Congress has not explicitly authorized such legislation. I 

personally find it exceedingly strange and inappropriate that many 

States require hair barbers to have a license, but someone filing 

very complicated tax returns does not need a license. 

So, Mr. Camus, how critical is it for the IRS to be able to regulate tax preparers, and would doing so reduce the amount of fraud 

and identity theft? 

Mr. CAMUS. I think it is critically important for anybody who 

does such an important job in such an important area as tax administration, that there is training available and they are held accountable and there are standards that have to be met. 

I know we work closely with our partners in IRS Criminal Investigation and the Department of Justice Tax Division, when we 

come across an unscrupulous tax preparer, to bring them to justice. 

I think it is critically important that those individuals whom elderly folks and other people trust and depend on to file very complicated forms—because they do not understand—do not become 

victimized by the very people whom they trust. 

Senator MENENDEZ. Well, let me ask you this. Can you or Ms. 

Ciraolo quantify for me in any way how much fraud is related to 

unscrupulous tax preparers? 

Ms. CIRAOLO. Senator, we share your concerns with respect to 

fraudulent tax preparers and believe that the U.S. taxpayers who 

engage a preparer should be able to trust that person to be competent and qualified to prepare the returns and to prepare an honest and accurate return. In the last year alone, the Tax Division 

has obtained injunctions against more than 40 fraudulent preparers and promoters and will continue to prosecute those individuals who willfully assist in the preparation of fraudulent returns. 

Senator MENENDEZ. So do you have any idea how many tax preparers—this is my final question, Mr. Chairman—how many tax 

preparers there are? 

Ms. CIRAOLO. Senator, I do not have that information in front of 

me today. 

Senator MENENDEZ. Is that number based on complaints, or is it 

based on the 40 that you—it sounds like a small number compared 

28 

to the universe of preparers that I would assume are out there. So 

is that based on complaints, or is that based on the Service’s own 

investigations? 

Ms. CIRAOLO. The Tax Division works with the Internal Revenue 

Service in identifying fraudulent preparers, and, based on the evidence that we have received, we follow that evidence where it leads 

and pursue injunctions, where appropriate, against preparers. 

Senator MENENDEZ. Do you have a number of complaints filed 

with you? 

Ms. CIRAOLO. I can tell you that, since 2000, we have filed over 

500 injunctions against fraudulent preparers. 

Senator MENENDEZ. All right. Thank you, Mr. Chairman. 

The CHAIRMAN. Well, thank you, Senator. 

I want to thank all our witnesses for appearing here today. I also 

want to thank all the Senators who participated. I think this has 

been a very good hearing, and hopefully we can move on from here. 

Any questions for the record should be submitted no later than 

Thursday, March 19th. This hearing will be adjourned at this 

point. Thanks so much. Thanks to all of you. We really appreciate 

it. 

[Whereupon, at 11:30 a.m., the hearing was concluded.] 

(29) 

1http://www.idtheftcenter.org/images/page-docs/2014AnnualReport20150227.pdf. 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF HON. MIKE ALLEY, COMMISSIONER, 

INDIANA DEPARTMENT OF REVENUE

INTRODUCTION

Chairman Hatch, Ranking Member Wyden, and committee members, thank you 

for inviting me to discuss this important topic with you today. Senator Coats, thank 

you for that kind introduction. On behalf of Governor Mike Pence and the citizens 

of Indiana, it is my honor to appear before you today to address this critical issue 

that faces everyone in the tax and revenue processing industry. 

You have asked me to discuss Tax Schemes and Scams During the 2015 Filing 

Season. Specifically, I would like to illuminate the identity theft and tax refund 

fraud experiences of Indiana over the last two years and note the extent of this challenge facing all government entities in today’s environment. And I can tell you from 

first-hand experience that this is a problem that must be addressed at multiple levels. This morning I would like to address this issue from three perspectives: 

First: The nature of the problem and its overall breadth. 

Second: Steps Indiana has taken in an effort to combat the problem and lessons 

we have learned. 

Third: Recommendations from our perspective on additional approaches we 

must take to more fully and effectively address this epidemic issue nationwide. 

THE NATURE OF THE PROBLEM

Tax refund fraud is one of several lucrative platforms for criminals to monetize 

the value of stolen identity information. It is being perpetrated by thousands of culprits from the small time individual fraudster to large, sophisticated criminal enterprises. In the past, it has been very easy with negligible risk of apprehension or 

prosecution. The advent of electronic filing and processing has enhanced the ability 

of criminals to utilize economies of scale in filing large volumes of fraudulent returns, at a nominal cost, replicating numerous returns with only minor changes in 

original identity information. The zeal of departments of revenue to speed up the 

processing of returns and reducing turn-around time for refunds—all in the spirit 

of good customer service—also has contributed to the problem making it easier for 

criminals to take advantage of the system. Our systems were designed to process 

rapidly and efficiently—not to screen for fraud and fabricated identities. 

The Identity Theft Resource Center,1 in their 2014 Annual Report, created a diagram that effectively illustrates the interrelationship of the criminal activity and 

our oftentimes disjointed responses. We must develop a coordinated effort to battle 

ID theft and mitigate the risks of misuse. 

30 

In calendar year 2014, twelve percent of the total tax refund dollars requested 

from Indiana was found to be fraudulent. We identified more than 78,000 fraudulent 

tax returns filed using manufactured or stolen identities, and prevented more than 

$88 million in fraudulent refunds from being issued. This mirrors similar statistical 

reports from the U.S. Government Accountability Office that reports the IRS lost 

an estimated $5.8 billion to fraudulent refund claims in 2013 while blocking about 

$24 billion in attempts. They further reported that suspected identity theft incidents 

for 2013 were nearly 2 million, an increase of more than 350% from 2010. We hear 

anecdotally from other states that they also are experiencing comparable fraudulent 

activity. 

Though early in the 2015 filing season, we are already seeing a dramatic increase 

in the use of valid identities which have been stolen. With the advent of reported 

successful hacks at many large U.S. companies, we believe the availability of valid 

stolen identities for tax fraudsters has never been greater. This is particularly concerning because stopping fraud with valid identity information is much more difficult than screening for manufactured identities which was the most common practice of fraudsters in the past. The fraudsters have upped their game and we must 

respond accordingly. 


031215.001
31 

WHAT ARE WE DOING IN INDIANA?

In Indiana, we knew we were suffering some tax fraud based on identity theft, 

but we did not have a reliable method to calculate the actual impact. In 2012, we 

began conducting research and analysis of our processes and statistical filing results. We noted that it appeared Indiana was processing more returns and paying 

out more money in tax refunds than seemed reasonable based on our estimated population growth. Figure 1 (Return Growth) illustrates the growth of our total returns 

(Red Line) compared to our total refund returns (Blue Line). The green bars show 

our overall electronic filing percentage. The growth of two hundred thousand taxpayers in a just a couple of years strained credibility, so we looked for other reasons 

why we would be getting so many more tax returns. 

Our analysis determined that identity theft and refund fraud was the most likely 

explanation for the accelerated growth in returns and refund requests. Once we 

identified these phenomena, we brought key staff together and worked with the office of Governor Pence and our General Assembly to develop a strategy to define 

elements of an effective identity fraud program for the Indiana Department of Revenue. 

Key objectives of our approach were: 

1. Ensure that we do not mistreat legitimate taxpayers because of a small number of dishonest individuals. 

2. Protect taxpayer dollars and taxpayer identities. 

3. Protect state revenues from issuance of fraudulent refunds. 

4. Identify the criminals for deterrence efforts. 

5. Ensure fraudulent dollars do not affect our revenue based distributions and 

financial reporting. 

These became the guidelines that our identity protection team would follow. We 

knew that we needed to make significant systemic modifications and we needed to 

do it before the next tax season. Staff reached out to our fellow states through the 

Federation of Tax Administrators (FTA) and our partners at the IRS to see if there 

were ideas that we could borrow and implement. 

The response was very supportive and we were welcomed to view, visit, and exchange ideas with our counterparts across the United States. Many of them had 

partial solutions or had tried to implement incremental improvements. The time we 

spent working with other states confirmed that Indiana was less prepared and needed to catch up. On the positive side, we discovered that there were ready-made commercial solutions that we could bring to Indiana that could have a major impact in 

a short period of time. 


031215.002
32 

Governor Pence reviewed the data we provided and the potential solutions the department suggested. With his support, we initiated a pilot program to screen all returns for suspicious identities. The program used LexisNexis, a third party commercial vendor, to screen the returns and note identity information such as name, address, social security number, or other identifier information that appeared suspicious. Processing of those returns screened as suspicious was suspended and an 

identity confirmation quiz request was sent to the taxpayer at their filing address. 

Taxpayers were asked to confirm their identities by completing a short quiz. They 

could log into a secure website or could call our call center where we had dedicated 

analysts to handle their quiz. As a result of implementing this pilot effort the department expected to directly reduce fraudulent refunds by $25 million with an investment of $8 million in staffing and technology. Our actual results confirmed more 

than $88 million of attempted refund fraud identified and stopped with $42 million 

attributable directly to this identity screening tool. 

The identity confirmation quiz is very powerful and made a significant difference. 

But it is not a panacea. It is only part of a larger process to strategically focus on 

identity theft and refund fraud which encompassed additional talent, new procedures, and new IT systems. We made it clear in the beginning that the department 

would need to make systematic changes. We took the following steps: 

1. Procured an identity confirmation vendor (LexisNexis) 

2. Hired additional staff 

3. Conducted a public relations campaign 

4. Made agreements with software vendors to begin setting standards 

5. Began modernizing infrastructure to specifically confirm identity information 

and recognize fraud trends 

Figure 2 (2014 Indiana Fraud by Source) demonstrates that we stopped more than 

$88 million in fraudulent refunds being paid to manufactured or stolen identities 

in the pilot year alone (2014). The identity screening via the identity confirmation 

quiz was the simplest fraud to stop and we took advantage of that simple process 

to concentrate on the more sophisticated fraud schemes using our enhanced professional analysts and early analytics. 

Source # of Returns Description Total Refunds Stopped 

Analyst Review 34,300 Investigation and decision by trained 

fraud prevention staff 

$45,642,625 

Identity Confirmation Quiz 43,918 No response to Identity Confirmation 

Quiz notifications 

$42,426,289 

Calendar Year 2014 Total $88,068,914 

Figure 2: Indiana 2014 Fraud by Source 

In one sense, the $88 million was gratifying—but it was also astonishing. The 

problem was much larger than we had anticipated. The end-of-year fraud statistics 

were interesting as well. Almost four percent of returns we processed in 2014 were 

identity fraud. A surprising data point was that these 78,000 returns represented 

12% of the value of all refund requests. While this was higher than expected, it 

makes sense when we consider that the fraudsters are attempting to maximize their 

profitability. We also identified that Indiana paid out $4 million in identity fraud 

refunds that we later identified as fraudulent but were unable to stop. Some fraud 

gets through before we can identify a new pattern and react. This illustrates that 

our efforts to identify and stop refund fraud must continue. 

We could not have achieved these positive results without additional resources 

and multiple components to our identity theft and refund fraud program, including 

an $8 million augmentation to the department’s budget. Indiana added 15 call center people to assist our taxpayers with the identity confirmation quiz. We also added 

eight additional fraud analyst positions, a prosecutor with fraud experience, a public 

relations professional, and information technology professionals. 

Our public relations campaign was critical to our success in educating citizens, 

rallying market professionals, and explaining the outcomes to stakeholders and 

media. This allowed us to alert our taxpayers that protecting their identities was 

33 

a priority for us and though it might slow down the refund process slightly, it would 

better ensure protection of their identities and avoid a strain on state finances. Further, it provided assurance that if they should receive an identity confirmation quiz, 

it was legitimate and no cause for alarm. 

One quiet, but crucial, key to our success was gaining more control of the interfaces and behavior of our software vendor partners. During the 2014 filing season, 

we began tracking fraudulent returns submitted by each software vendor. As the 

Fraud by Software Vendor Table (Figure 3) clearly demonstrates, there was a large 

variability among software vendors of the incidence of fraud. The data shows that 

some vendors are taking fraud seriously and implementing protective screening 

while some are either unaware of, or unable to stop fraud. A few vendors claimed 

that they were not responsible for doing any fraud prevention at all. 

Fraud by Refund Return 

Count (%) 

Fraud by requested 

refund amount (%) 

Highest 92% 85.0% 

Average 22.3% 11.0% 

Median 6% 2% 

Mode 1% 1% 

Lowest 1% 0% 

Figure 3: Fraud by Software Vendor 

As a result, in 2015 Indiana required that all software vendors wishing to be certified to file Indiana returns sign agreements with the state. The agreements made 

it clear to vendors that they would be monitored for the fraud they sent along to 

Indiana. Software vendors that experienced excessive fraud in 2014 were not certified unless they provided evidence of increased fraud screening on their part. We 

concluded that there is no reason to maintain a business relationship with a vendor 

that is not playing their part in fraud prevention. 

For the 2015 filing season, we have continued to make significant enhancements 

to our identity theft and refund fraud program. We continue to use the identity theft 

screening tool contracted with LexisNexis with enhanced elements based upon lessons learned. In addition, we have implemented a new pre-filter processing platform 

that provides us the ability to run all of our individual returns through an extensive 

screening prior to being processed in our normal returns processing system. This 

pre-filter process includes a decision matrix toolset which allows us to establish multiple filter parameters to detect fraudulent returns and unusual activity. This provides dramatically enhanced agility and adaptability during the filing season as we 

experience various patterns or learn of new issues so that processing rules and parameters can be easily adjusted. This pre-filter platform was built with the assistance of Revenue Solutions, Inc. (RSI), a third party vendor specializing in tax processing. 

LESSONS LEARNED

We are still early in battling this problem but the following early lessons are apparent: 

1. Strategic priority: identity theft and refund fraud have escalated dramatically over the last two years and in order to effectively combat the problem, 

it must be a strategic priority. This demands making a fiscal investment 

in leadership, staff, technology, and third party resources. Priority support 

must be in place from the top down. Governor Pence has consistently supported our efforts to combat identity theft and refund fraud, which has been 

crucial in our ability to continue to invest in and improve our program. 

2. Collaboration: no one has all of the answers. The perpetrators are sophisticated and agile, moving from one vulnerability to the next. Sharing data, 

best practices, and experiences among revenue agencies, both state and federal, along with software vendors and support vendors is critical. The Federation of Tax Administrators (FTA) has actively assumed a key role as 

facilitator but must be strongly supported by all parties involved. 

34 

3. Taxpayer Support: Taxpayers are willing to be part of the solution if they 

understand what you’re trying to achieve. We received minimal resistance 

to the identity confirmation quiz. However, communicating in advance that 

this is a valid tool and not another scam is critical. 

4. Targeted Solutions: There are many types of fraud, fraudsters, and different 

means for filing returns. It is important to understand the intricacies so 

that targeted solutions can be developed and applied. We can no longer review returns individually but must identify broad traits so that we can systemically identify suspicious activity and address it collectively. In the past, 

we treated all fraud the same which is neither efficient nor necessary. 

5. Prepaid Debit Cards: Use of prepaid debit cards is the preferred tool of 

fraudsters in receiving their refunds. They can be purchased with virtually 

no identification or registration and are readily transferable from the card 

to gift cards, bank accounts, other debit cards, or even to purchase goods 

and services. 

6. Fraudsters Hide: Sophisticated fraudsters use stolen or invalid identities to 

open bank accounts, transfer money, and further insulate themselves from 

the refund once it is received. This makes it even more difficult to apprehend and prosecute the culprits. 

7. Manufactured Identity: A ‘‘Manufactured Identity’’ is one where the fraudsters have simply filled out federal or state returns with completely made 

up identities and tax data. They may use celebrity names or obscure names 

with bogus addresses and social security numbers and have the refund deposited to a prepaid debit card that requires virtually no purchaser identification. These are often being perpetrated by relatively unsophisticated 

fraudsters and rely upon tax software vendors that allow filing fees to be 

deducted from the refund itself thus requiring no cash outlay in advance. 

Fortunately, our LexisNexis identity confirmation tool is very effective at 

identifying these fraudulent attempts as the identity information does not 

match to valid external information. 

8. Unlinked Return: An ‘‘Unlinked Return’’ is one that does not have a federal 

tax return associated with it and is filed directly with a state bypassing 

many of the IRS fraud safeguards. This unlinked return process is also used 

by fraudsters to file in multiple states rather than simply one using the 

same fraudulent identity. Though it is possible to have a valid unlinked return, the rate of fraud is very high and requires additional review. 

9. Synthetic Identity: A ‘‘Synthetic Identity’’ is one which has been amalgamated from existing identity information such as children or deceased 

relatives and contains enough valid identity information to appear to be a 

valid identity. 

10. Stolen Identity: A ‘‘Stolen Identity’’ is one where the fraudsters have obtained valid taxpayer information comprised of names, addresses, social security numbers, and sometimes even dependents, from real taxpayers. 

These culprits then seek to gain fraudulent refunds in two ways. First, they 

file a federal return early in the filing season before the real taxpayer submits their valid return. Second, they file directly with a state, or multiple 

states, that is usually not where the valid taxpayer is actually located. 

THE ULTIMATE APPROACH TO COMBAT THIS PROBLEM

In order to effectively overcome the problem of identity theft and refund fraud, 

all parties involved must work collaboratively. We must develop cross-functional 

teams with significant coordination among the three key players in our tax system. 

Consider the Three Legged Stool concept depicted in Figure 4 which notes that the 

states, the IRS, and software vendors each represent an important leg of the stool. 

Each has unique data, perspectives, and capabilities that the system as a whole requires in order to make better decisions. 

35 

The ‘‘three legged stool’’ concept allows each leg to execute appropriate roles within our present tax system resulting in an effective and collective solution. 

Indiana believes that our partners at the IRS are in the best position to centrally 

manage the highly sophisticated fraud. The IRS can help the states define the expected behavior of the software vendors which could include security requirements, 

potential fraud reporting, and corrective behavior for vendorsnot operating according 

to the systematic norm. The central location in this process also makes the IRS a 

better place to accomplish analytics to identify multi-state fraud patterns, manage 

a shared database, correlate with other data sets (Social Security Administration 

and others), and coordinate national and international enforcement efforts. Without 

data driven prosecution and enforcement, the culprits face little risk in continuing 

to conduct this sort of activity. 

States must also work collaboratively with one another to develop and share effective analytics, algorithms, and best practices. The Federation of Tax Administrators 

(FTA) has convened a Fraud Working Group comprised of multiple states, including 

Indiana, that have already made a significant commitment to developing taxpayer 

identification validation standards and consistent communication and monitoring 

mechanisms to ensure that uniform data elements can be captured and shared. 

Their intent is to establish uniform practical measures that the software vendor industry can support and that will be applied consistently, avoiding disparate rule 

sets and expectations from each state. This will enhance the likelihood of industry 

compliance. The FTA has also positioned itself as a facilitator and clearinghouse for 

the states as well as the IRS in sharing best practices and innovations. They can 

be very effective in helping communicate with members the importance of identity 

theft and refund fraud prevention programs and the positive economic impact it will 

have. States must recognize this value and be willing to commit the necessary resources. 


031215.003
36 

Software vendors must be responsive to the IRS and states as they learn more 

about the methods used by fraudsters. We have already learned that account access 

must be protected with multi-factor authentication. However, software vendors also 

have multiple other data sources and analytics which they must be willing to use 

to stop fraud from inception. Further, as their intelligence increases, they must be 

willing to share that intelligence with states and the IRS as their partners. 

CONCLUSION

In conclusion, I would like to emphasize the following points: 

First, identity theft and refund fraud is an epidemic problem and growing rapidly. 

It currently represents one of the easiest means available for fraudsters to monetize 

stolen identity information. We are all aware of the increased vulnerability we face 

for protection of identity information. 

Second, collaboration and information sharing among the IRS, state departments 

of revenue, and tax processing and software vendors is essential. Strengthening of 

the ‘‘three legged stool’’ by tax processing partners will allow us to more effectively 

combat identity theft and refund fraud through enhanced analytics, sharing of information, and implementation of best practices. This sharing and collaboration must 

be in real time, not days or weeks down the road. Delays in digesting new information or implementing good ideas leaves the window of vulnerability open longer for 

fraudsters to enter. 

Third, investment in identity theft and refund fraud prevention tools will provide 

a strong return on investment. In 2014, Indiana realized greater than a 10 times 

return on investment based upon fraudulent refunds stopped compared to actual 

program costs. I encourage states as well as the federal government to make our 

battle against identity theft and refund fraud a strategic priority. This also means 

backing that priority with necessary funding to move the dial. I’m confident it will 

provide a significant return on investment and also protect our citizens. 

On behalf of Governor Mike Pence and the citizens of Indiana, I thank you for 

your time today. I appreciate the committee’s willingness to examine this issue and 

we in Indiana stand ready to assist and participate in a comprehensive solution. 

PREPARED STATEMENT OF TIMOTHY P. CAMUS, DEPUTY INSPECTOR GENERAL FOR

INVESTIGATIONS, TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION, DEPARTMENT OF THE TREASURY

Chairman Hatch, Ranking Member Wyden, and Members of the Committee, 

thank you for the opportunity to testify on the topic of Tax Schemes and Scams during the 2015 filing season. 

I also want to thank you for holding a hearing on this topic, for by doing so, you 

are bringing attention to these schemes and scams, and thereby alerting your constituents and others across the country to their existence. By raising public awareness about such efforts to swindle people out of their money, we may prevent the 

next person from becoming a victim. And if we protect even one taxpayer from this 

type of theft, we have done a very good thing. 

The Treasury Inspector General for Tax Administration, also known as ‘‘TIGTA,’’ 

is statutorily mandated to provide independent audit and investigative services necessary to protect the integrity of Federal tax administration as well as to improve 

the economy, efficiency, and effectiveness of Internal Revenue Service (IRS) operations. TIGTA’s role is critical in that we provide the American taxpayer with assurance that the approximately 91,000 IRS employees, who collected over $3.1 trillion 

in tax revenue, processed over 242 million tax returns and other forms, and issued 

$374 billion in tax refunds during Fiscal Year (FY) 2014, did so with the highest 

degree of integrity and in an effective and efficient manner while minimizing the 

risks of waste, fraud, or abuse. This includes investigating individuals who use the 

IRS as a means of furthering fraudulent, criminal activity that could call into question the integrity of the IRS, as well as investigating allegations of serious misconduct by IRS employees and investigating threats of violence against the IRS, its 

employees, and facilities. Over the past year, a significant part of our workload has 

been devoted to investigating scams that can negatively impact the integrity of tax 

administration. 

Tax scams are nothing new. For at least the last decade, the IRS has provided 

the public with information about what it sees as the ‘‘Dirty Dozen’’ tax scams on 

37 

its website. These scams range from offshore tax avoidance to fake charities and inflated refund claims. Compiled annually, the ‘‘Dirty Dozen’’ lists a variety of common scams that taxpayers may encounter. However, many of these scams peak during the filing season as people prepare their returns or utilize the services of paid 

preparers. 

The 2015 filing season has unfortunately brought more of the same. However, 

there are two tax scams in particular that are among the most pernicious and dangerous. They have proven to be surprisingly effective and fast ways to steal taxpayers’ money, and in this fast-paced electronic environment, the money can be gone 

before the victims ever realize they have been scammed. 

PHONE IMPERSONATION SCAM

The phone impersonation scam has proven to be so large that it is one of my agency’s top priorities, and it has also landed at the top of the IRS’s ‘‘Dirty Dozen’’ tax 

scams this year. The number of complaints we have received about this scam make 

it the largest, most pervasive impersonation scam in the history of our agency. It 

has claimed thousands of victims, including victims in every State represented on 

this committee, with reported losses totaling more than $15.5 million dollars to 

date. Here is how it works: 

The intended victim receives an unsolicited telephone call from a person claiming 

to be an IRS agent. The caller, using a fake name, tells the victim their ‘‘badge number,’’ and claims that they owe taxes and are criminally liable for an amount owed. 

The callers may even know the last four digits of the victim’s Social Security Number (SSN). They then threaten the victim by stating that if they fail to pay the 

amount immediately, the victim will be arrested, a suit will be filed, or some other 

form of adverse official action will be taken. These actions have been reported to 

include loss of a driver’s license, deportation, or loss of a business license. They 

often leave ‘‘urgent’’ callback requests and call multiple times. Although these callers initially preyed on the most vulnerable people, such as the elderly, newly arrived 

immigrants and those whose first language is not English, they have expanded their 

scam to people from every walk of life. The continued number of people receiving 

these unsolicited calls from individuals who fraudulently claim to represent the IRS 

is alarming. 

We first started seeing concentrated reporting of these calls in August, 2013. As 

the reporting continued through the fall, in October 2013, we started to specifically 

track this crime. To date, we have received hundreds of thousands of complaints 

about these calls. According to the victims, the scam artists made the threatening 

statements as described above, and then demanded that the victims immediately 

put money on prepaid debit cards in order to avoid being immediately arrested. The 

callers often warned the victims that if they hung up, local police would come to 

their homes to arrest them. The scammer may also send bogus IRS e-mails to support their scam. Those who fell for the scam withdrew thousands of dollars from 

their bank accounts and then purchased the prepaid debit cards as instructed by 

the callers. Once the prepaid debit cards were purchased, the criminals instructed 

the victims to call them back and to read the numbers off of the prepaid card. By 

the time the victims realized they had been scammed, the criminals had negotiated 

the prepaid cards and the money was long gone. 

One particularly sad story was shared with TIGTA by a member of this Committee in a letter written on behalf of a constituent regarding the tragic death of 

the constituent’s father as a result of receiving several threatening calls from a 

scammer claiming to be from the IRS and demanding money. This scam has cost 

thousands of taxpayers millions of dollars, but to my knowledge, this may be the 

most heartbreaking result. TIGTA continues to work with the IRS to strengthen its 

efforts to crack down on this type of abuse and try to prevent other vulnerable individuals from being victimized by this kind of fraud. 

To date, TIGTA has received over 366,000 reports of these calls. We receive between 9,000 and 12,000 reports of these calls each week. As of March 9, 2015, 3,052 

individuals have been victimized by this scam by paying a total of $15.5 million, 

averaging over $5,000 per victim. The highest reported loss by one individual was 

over $500,000. In addition, 296 of these victims also provided sensitive identity information to these scammers. The scam has claimed victims in almost every State 

in the country. For example, taxpayers in Utah have lost more than $276,000 to this 

scam, and taxpayers in Oregon have lost more than $180,000. As of February 28, 

2015, the top five States for total dollar losses by victims are California ($3,840,000), 

38 

1S.D. Fla. Crim. Compl. filed Sept. 5, 2014. 

2S.D.N.Y. Indict. filed Mar. 6, 2014. 

New York ($1,352,732), Texas ($795,884), Florida ($760,000), and Virginia 

($648,363). 

The criminals do not discriminate; they are calling people everywhere, of all income levels and backgrounds. In fact, I myself received one of these calls on my 

home telephone on a Saturday, and you may also have received a call or know of 

a family member or constituent who has received one as well. Based on reviewing 

the complaints we have received, we believe the calls are now being placed from 

more than one source. This scam is the subject of an ongoing multi-agency investigation. For this reason, there is much that we are doing to apprehend the perpetrators, but I am not at liberty to disclose specifically what is being done as it 

may impede our ability to successfully bring these criminals to justice. I can tell you 

it is a matter of high priority for law enforcement. As I told the individual who 

called me on my home phone, ‘‘your day will come.’’ 

In the meantime, we are investigating some of the individuals who process the 

money, and most recently we arrested two individuals associated with this type of 

scam. The two individuals were arrested and prosecuted for their role in converting 

the prepaid money cards. When interviewed, one of the defendants estimated she 

had used prepaid debit cards to purchase approximately $5,000 in money orders per 

day, six days a week, since November 2013, or roughly $900,000 in money order 

purchases between November 2013 and July 2014.1 In another case, in March 2014, 

an individual was indicted for using an impersonation scam. More specifically, he 

was indicted for extortion, false impersonation, and fraud.2

However, there is much more that needs to be done, as these three examples are 

part of a broader ring of scam artists operating beyond our borders. This is unfortunately similar to most of the cybercrime we are seeing today—it is international in 

nature and committed using technology, e.g., in the case of the phone fraud scam, 

the use of Voice over Internet Protocol technology, and much of it originates from 

a computer outside of the United States. To further deceive their intended victims, 

by using this technology, the criminals create false telephone numbers that show 

up on the victim’s caller ID system. For example, the criminals make it appear as 

though the calls are originating from Washington, D.C., or elsewhere in the United 

States. 

I am also concerned that these criminals and their copycats, like the bank robbers 

of old, will go where the money is, and will keep using this scam as long as people 

fall victim to it. For example, we have noted an increasing number of recent reports 

that the calls are coming in using robo-call technology. When the robo-calls are 

used, the scammers leave messages demanding that the victim immediately call 

back a telephone number and speak to a representative. Although the robo-calls are 

a different approach, the outcome is the same: once the criminal gets the victim on 

the phone, they demand immediate payment and threaten the victim with arrest 

for failing to comply with their demands. 

Accordingly, we are reaching out aggressively by granting media interviews with 

all the major networks, and issuing warnings and multiple press releases to the 

media in conjunction with the IRS and the Federal Trade Commission (FTC), as 

well as providing this testimony to your Committee. Our message is simple: If someone calls unexpectedly claiming to be from the IRS with aggressive threats if you 

do not pay immediately, it is a scam artist calling. The IRS does not initiate contact 

with taxpayers by telephone. If you do owe money to the IRS, chances are you have 

already received some form of a notice or correspondence from the IRS in your mailbox. 

To recap, the IRS will never: 

• Call to demand immediate payment, nor will the IRS call about taxes owed 

without first having mailed you a notice; 

• Demand that you pay taxes without giving you the opportunity to question or 

appeal the amount they say you owe; 

• Require you to use a specific payment method for your taxes, such as a prepaid 

debit card; 

• Ask for credit or debit card numbers over the phone; and 

• Threaten to bring in local police or other law enforcement groups to have you 

arrested for not paying. 

39 

3 E.D.N.Y. Response to Defendant’s Sentencing Letter filed Dec. 19, 2011 and E.D.N.Y. Superseding Info. Filed May 10, 2011. 4 E.D.N.Y. Judgment filed Dec. 27, 2011. 

Remember, also, the IRS does not initially use e-mail, text messages, or any social 

media to discuss your personal tax issue involving taxes owed or refunds. For more 

information on reporting tax scams, go to www.irs.gov and type ‘‘scam’’ in the search 

box. If you have been targeted by this scam, report the incident to TIGTA at 

www.tigta.gov by clicking on the IRS Impersonation Scam Reporting tab in the 

upper right corner, or call the TIGTA hotline at 1–800–366–4484. In addition, contact the FTC and use their ‘‘FTC Complaint Assistant’’ at www.ftc.gov. Please add 

‘‘IRS Telephone Scam’’ to the comments of your complaint. If you know you owe 

taxes or think you might owe, call the IRS at 1–800–829–1040. They can help you 

with a payment issue. 

LOTTERY WINNINGS

The lottery winnings scam we are seeing this filing season is a continuation of 

an older scam. It starts with an e-mail or telephone call stating that you have won 

the lottery and in order to collect the winnings, you need to send money to prepay 

the tax to the IRS. The lottery scam often, but not always, originates from outside 

of the United States, and continues because it capitalizes on a very common dream; 

getting rich quick and hitting the jackpot. 

In one of the largest cases of this type, an individual and his co-conspirators operated a scheme to defraud numerous individuals through Internet solicitations, stealing more than $1 million as well as the identities of the victims. The criminals obtained and used massive e-mail distribution lists containing thousands of e-mail addresses to send unsolicited e-mails falsely informing victims that they had won a 

lottery or had inherited money from a distant relative. Follow-up e-mails instructed 

the victims to provide personal and bank account information to receive their lottery 

winnings or inheritance. Subsequent e-mails to victims falsely indicated that a Government or a quasi-governmental agency, such as the IRS or the United Nations, 

would not pay the money due to them because advance payment of taxes and other 

fees was required. The e-mails solicited the victims to wire money to pay the taxes 

and other fees to designated bank accounts controlled by the criminals.3

However, if the victims were unable to pay the taxes and fees, the criminals offered to loan them the money. The victims were then convinced to open online bank 

accounts and provide the necessary login information to the criminals. Using this 

information, the criminals stole money from various other bank accounts, transferred that stolen money to the victims’ accounts, and then instructed the victims 

to wire the money to foreign bank accounts controlled by the criminals. In the end, 

the victims never received any lottery winnings, inheritance, or other money in connection with the scheme; however, they may have received much grief for unknowingly being placed in the middle of a money laundering scheme. 

The lead defendant was sentenced to a total of 30 months of imprisonment and 

five years of supervised release for Aggravated Identity Theft and Conspiracy to 

Commit Wire Fraud. He was also ordered to pay $1,741,822 restitution to his victims and a $200 assessment.4

OTHER FRAUDS IMPACTING TAX ADMINISTRATION 

IDENTITY THEFT

The IRS continues to make improvements in its identification of identity theft tax 

returns at the time the returns are processed and before fraudulent tax refunds are 

released. The IRS has described identity theft as one of its ‘‘Dirty Dozen’’ and recognizes that new identity theft patterns are constantly evolving and, as such, it needs 

to adapt its detection and prevention processes. 

Notwithstanding improvements in its detection efforts, the IRS still does not have 

timely access to third-party income and withholding information. Most of the thirdparty income and withholding information is not received by the IRS until well after 

taxpayers begin filing their tax returns. For example, the deadline for filing most 

third party information returns with the IRS is March 31, yet taxpayers began filing 

their tax returns for the 2015 Filing Season on January 20th. As of February 27, 

2015, the IRS has received approximately 58.5 million individual tax returns. Legislation would be needed to accelerate the filing of the information returns. 

40 

5 A processing year is the calendar year in which tax returns are processed by the Internal 

Revenue Service. 6TIGTA, Ref. No. 2014–40–091, Prisoner Tax Refund Fraud: Delays Continue in Completing 

Agreements to Share Information With Prisons and Reports to Congress Are Not Timely or Complete (Sept. 2014). 

The IRS has taken steps to more effectively prevent the filing of identity theft tax 

returns by locking the tax accounts of deceased individuals to prevent others from 

filing a tax return using their name and SSN. The IRS has locked approximately 

26.3 million taxpayer accounts between January 2011 and December 31, 2014. 

These locks prevent fraudulent tax returns from entering the tax processing system. 

For Processing Year 2014,5 the IRS rejected 338,807 e-filed tax returns and stopped 

15,915 paper-filed tax returns through the use of these locks as of September 30, 

2014. 

Additionally, the IRS continues to take steps to more effectively detect and prevent the issuance of fraudulent refunds resulting from identity theft tax return filings. The IRS continues to expand identity theft filters to identify fraudulent tax 

returns at the time they are processed. It has expanded the number of identity theft 

filters used to identify potentially fraudulent tax returns and prevent the issuance 

of fraudulent tax refunds from 114 filters during Processing Year 2014 to 196 filters 

during Processing Year 2015. The identity theft filters incorporate criteria based on 

characteristics of confirmed identity theft tax returns. 

Tax returns identified by these filters are held during processing until the IRS 

can verify the taxpayer’s identity. As of January 31, 2015, just 11 days after the 

filing season began, the IRS reported that it identified and confirmed 264 fraudulent 

tax returns and prevented the issuance of more than $2 million in fraudulent tax 

refunds as a result of the identity theft filters. 

In addition to the above actions, the IRS developed and implemented a clustering 

filter in response to TIGTA’s continued identification of large volumes of undetected 

potentially fraudulent tax returns with tax refunds issued to the same address or 

deposited into the same bank account. The clustering filter tool groups tax returns 

based on characteristics that include the address, zip code, and/or bank routing 

numbers. Using this tool, the IRS reports that as of October 9, 2014, it identified 

517,316 tax returns and prevented the issuance of approximately $3.1 billion in 

fraudulent tax refunds. 

PRISONER FRAUD

Refund fraud associated with prisoner SSNs remains a significant problem for tax 

administration. The number of fraudulent tax returns filed using a prisoner’s SSN 

that were identified by the IRS increased from more than 37,000 tax returns in Calendar Year 2007 to more than 137,000 tax returns in Calendar Year 2012. The refunds claimed on these tax returns increased from $166 million to $1 billion. As of 

February 28, 2015, the IRS reports that it identified 24,011 potentially fraudulent 

tax returns filed by prisoners for screening. 

In September 2014, TIGTA reported that the IRS has not yet shared fraudulent 

prisoner tax returns and return information with Federal or State prison officials.6

As of June 2014, the IRS has yet to complete needed agreements to begin sharing 

information related to false prisoner tax returns and return information with Federal and State prison officials. This is despite the fact that the IRS was initially 

given the authority to share certain information with Federal prison officials in 

October 2008. The authority for the IRS to share information with prison officials 

is intended to enable prison officials to take action to punish prisoners for perpetrating fraud and to help stop this abuse of our tax system. 

TIGTA also found that the required annual prisoner fraud reports to Congress are 

not timely and that the reports do not address the extent to which prisoners may 

be filing fraudulent tax returns using a different individual’s SSN. In addition, we 

followed up on a condition identified in a past review and found that IRS processes 

still do not ensure that all tax returns filed using a prisoner SSN are assigned a 

prisoner indicator. Our analysis of tax returns filed during Calendar Year 2013 

identified 43,030 tax returns that were filed using a prisoner SSN that were not assigned a prisoner indicator. When tax returns filed using a prisoner SSN are not 

assigned the required indicator, the tax return will not be subjected to the IRS’s 

specialized prisoner fraud checks. 

41 

7 E.D. Pa. Judg. filed Dec. 16, 2014. 

8 E.D. Pa. Indict. filed Jan. 9, 2014; E.D. Pa. Info. filed June 3, 2014. 

9 Id. 

10 E.D. Pa. Info. filed June 3, 2014. 11S.D. Cal. Superseding Indict. filed June 19, 2012. 

UNSCRUPULOUS TAX PREPARERS

Tax preparers who steal a client’s identity information or their tax refunds can 

also cause great harm to the integrity of the Federal tax system. The following case 

highlights an example of this damage. 

Last December, an Ohio accountant was sentenced for wire fraud, engaging in 

monetary transactions in property derived from specified unlawful activity, mail 

fraud, and attempting to interfere with administration of the internal revenue laws. 

The accountant was sentenced to 36 months in prison, followed by three years of 

supervised release, and was further ordered to pay $987,050.00 in restitution to victims.7 From approximately 2009 through 2013, the accountant engaged in various 

schemes to defraud individuals to obtain money and property by means of false and 

fraudulent pretenses and representations, and to obstruct the due administration of 

the Internal Revenue laws.8

After the IRS issued a levy to a financial firm in the amount of $91,193.53 to collect taxes owed by one of his clients, the accountant transmitted, via e-mail, a falsified IRS Form 668–D, Release of Levy, which purported to remove the levy from 

the couple’s account. The accountant did so knowing the IRS had not authorized the 

release of the levy from that account.9

Prior to this, around April 2011, the accountant devised a scheme to defraud another victim, a senior citizen with little experience managing financial matters. The 

accountant falsely represented to the victim that the victim owed the IRS a substantial amount of taxes, and directed the victim to send him multiple payments for 

taxes purportedly owed by the victim. The accountant kept all of the money received 

from the victim and used it for his own personal and business expenses, defrauding 

the victim of approximately $237,050.10

In a different case, a tax preparer used the means of identification of other people 

to file false income tax returns and obtain refunds from the IRS. The preparer obtained most of the means of identification from his previous employment as a tax 

preparer and from other employment positions he held. He provided this information to co-conspirators so they could also file false income tax returns and obtain 

refunds from the IRS. The preparer and his co-conspirators ultimately defrauded or 

attempted to defraud the IRS out of at least $560,000 in tax refunds.11

PHISHING SCAMS

Phishing is a scam that has been around for several years and is typically carried 

out through the use of unsolicited e-mails or a fake website that poses as a legitimate site in order to lure potential victims in to either pay some sort of fee, or provide valuable personal and financial information. Armed with this information, a 

criminal can commit identity theft or financial theft. Phishing is often used as the 

technique to gather information to start other scams, such as the lottery scam identified earlier. 

My investigators are alerted to hundreds of new phishing scams every year. For 

example, my agents can encounter numerous fake e-mails that lead to fraudulent 

websites appearing to be legitimate, but actually looking to steal taxpayers’ personal 

information or to trick the victim into paying money. Also by clicking on any of the 

links in these e-mails or websites, innocent taxpayers have unknowingly invited the 

criminal into their computer where they can steal financial information, personal 

contact information, and even file more fraudulent documents. All the while, this 

activity is unknown to the victim. 

The best thing taxpayers can do is to be alert and to stop and think before 

clicking on any link. The first contact a taxpayer receives from the IRS will not be 

made via e-mail. If they receive an unsolicited e-mail that appears to be from either 

the IRS or an organization closely linked to it, they should be leery and call the 

IRS to verify the contact and report it by sending it to www.phishing@irs.gov. 

TIGTA and the IRS office of Online Fraud Detection and Prevention work closely 

together to protect innocent taxpayers from criminals who create fake websites that 

impersonate the IRS. In fact, since 2012, when the number of identified phishing 

42 

sites peaked at almost 19,000, we have seen a reduction in the number of identified 

phishing sites over the past two years to 1,200 in 2014. 

Chairman Hatch, Ranking Member Wyden, thank you for the opportunity to 

share my views. This concludes my testimony on some of the tax schemes and scams 

we have noted during the 2015 filing season. Much work is being done on multiple 

fronts to dismantle many of these schemes and scams, and our hope is that if we 

return to testify next year, these incidents will be greatly reduced or eliminated. 

PREPARED STATEMENT OF CAROLINE CIRAOLO, ACTING ASSISTANT ATTORNEY

GENERAL, TAX DIVISION, U.S. DEPARTMENT OF JUSTICE

Chairman Hatch, Ranking Member Wyden, and Members of the Committee, 

thank you for the opportunity to appear before you this morning to discuss the 

Department of Justice’s efforts to combat tax refund fraud arising from identity 

theft. 

The Department greatly appreciates the commitment that the Chairman, the 

Members of the Committee, and the staff have made to highlighting and addressing 

this important issue. Combatting the illegal use of social security numbers and 

other personal information to file false returns seeking fraudulent refunds is a top 

priority of both the Tax Division and the United States Attorneys’ Offices across the 

country. Your efforts to bring attention to this growing and insidious crime will help 

educate taxpayers about the importance of detecting and reporting identity theft 

and tax fraud. Today’s hearing also sends a strong message to those who would commit these crimes that their schemes will be detected and that they will be prosecuted to the fullest extent of the law. 

Using a variety of civil and criminal enforcement tools, the Division, with the assistance of our partners at the IRS and in the United States Attorneys’ Offices, has 

successfully enjoined hundreds of unscrupulous return preparers and other individuals who viewed the Federal Treasury as a personal bank account. Their schemes 

have included filing returns containing inflated, false deductions or false W–2 income statements, or preparing returns and failing to remit the refund to the taxpayer. In recent years, an even more aggressive scheme has spread across the country at an alarming rate—stolen identity refund fraud (‘‘SIRF’’). 

The plan is frighteningly simple—steal social security numbers, file tax returns 

showing a false refund claim, and then have the refunds electronically deposited or 

sent to an address where the offender can access the refund checks. In many cases, 

the taxpayer whose social security number has been compromised will later face difficulties when he or she files a tax return after the IRS received a false return using 

that taxpayer’s social security number. In other cases, the false returns are filed 

using social security numbers of deceased taxpayers or others from whom no federal 

tax return may be due for filing. These schemes are usually implemented in early 

January, before the proper taxpayer is expected to file their returns, with the goal 

of taking advantage of the IRS’s efforts to pay out refunds quickly. In many cases, 

the most vulnerable in our society are the victims of this form of identity theft. 

Names and social security numbers have been stolen at medical firms, prisons, and 

hospitals by dishonest employees who are often paid for the information. Postal 

workers have been robbed, and in one instance, murdered to gain access to refund 

checks. 

The high potential for financial gain and low physical risk have made stolen identity refund fraud the new crime of choice for drug dealers and gangs. The scope and 

organization of these criminals is vast and growing, and in certain cases, the criminal proceeds of the crime have been used to purchase illegal narcotics for resale. 

For taxpayers who are direct SIRF victims, the economic and personal consequences can be severe and often long-term. While the IRS has invested substantial efforts and resources to address identity theft concerns, those victimized face 

months, if not years, of overwhelming paperwork, credit problems, and inconvenience. When a stolen identity is used to commit tax refund fraud, all taxpayers are 

victims, and all Americans are impacted by the loss to the Federal Treasury. In recognition of the severity of the problem, the Department and the IRS have devoted 

significant resources to the successful prosecution of individuals engaged in stolen 

identity refund fraud. Individuals engaged in this criminal conduct face a variety 

of charges, including aggravated identity theft, theft of government property, false 

claims for refund, false returns, and tax conspiracy. 

43 

In the last several years, the Department has successfully prosecuted and received significant sentences in cases in which a stolen identity was used to commit 

tax refund fraud. For example: 

• In October 2013, in Alabama, a U.S. postal employee was sentenced to 111 

months in prison for his role in a stolen identity refund scheme. The mail 

carrier used mailing addresses on his postal route to send debit cards loaded 

with false refunds. Other defendants obtained the stolen identities used on 

the returns from the Alabama Department of Corrections. The defendants 

filed hundreds of fraudulent tax returns that claimed over $1 million in false 

refunds. 

• In May 2014, a superseding indictment was returned against nine defendants for their roles in a $20 million dollar stolen identity refund conspiracy. 

According to the allegations in the indictment, between 2011 and 2013, the 

defendants ran a large-scale identity theft ring in which they filed over 7,000 

tax returns claiming false refunds. As part the scheme, one of the defendants 

stole identities from the hospital at Fort Benning, Georgia where she worked 

and had access to the identification data of military personnel, including soldiers who were deployed to Iraq and Afghanistan. Other defendants stole 

identities from an Alabama state agency and from the Alabama Department 

of Corrections. 

• In June 2014, a Miami, Florida man was sentenced to 10 years in prison for 

stealing identities and then filing false returns that requested over $13 million in false refunds by fraudulently claiming gambling income and withholding from the Florida Lottery Commission. His co-conspirator opened approximately eighteen bank accounts to deposit these fraudulent refunds. 

• In December 2014, a Tennessee woman was sentenced to 102 months in prison. She and her co-conspirators unlawfully obtained personal identifying information of victims, including high school students, and used the information to file false tax returns claiming millions of dollars of refunds. Two coconspirators have been sentenced to 45 and 48 months in prison, respectively, and three others have pled guilty and await sentencing. 

• In January 2015, a Maryland woman and former bank employee, was sentenced to 87 months in prison for her role in a massive and sophisticated 

identity theft and tax fraud network involving more than 130 individuals. 

She is among approximately a dozen people who have pleaded guilty in the 

U.S. District Court for the District of Columbia to charges in one of the largest prosecutions to date involving the use of stolen identifying information. 

The overall case involves the filing of at least 12,000 fraudulent federal income tax returns that sought refunds of at least $40 million. 

As these examples illustrate, SIRF crimes are different from the crimes typically 

addressed by the Tax Division. While the typical criminal tax case may involve willfully filed false returns, evading the assessment of tax due and owing or the use 

of sophisticated financial schemes which invariably require lengthy in-depth investigations, SIRF crimes generally involve garden variety theft and fraud. Moreover, 

SIRF prosecutions are often reactive to exigent circumstances; in many cases, the 

crime is discovered by local law enforcement officers who come upon a large cache 

of Treasury checks or debit cards loaded with fraudulent tax refunds. 

Recognizing these fast-moving law enforcement needs, on October 1, 2012, the Tax 

Division issued Directive 144, which delegates to local United States Attorneys’ Offices the authority to initiate tax-related grand jury investigations in SIRF matters, 

to charge those involved in SIRF crimes by complaint, and to obtain seizure warrants for forfeiture of criminally-derived proceeds arising from SIRF crimes, without 

prior authorization from the Tax Division. The Tax Division retains authority in 

connection with forfeitures if any legitimate taxpayer refunds are involved. 

Directive 144 was the result of collaborative efforts among the Tax Division, the 

IRS, and the United States Attorneys’ Offices to strengthen the law enforcement response to SIRF crimes. The Tax Division continues to work closely with the IRS and 

United States Attorneys’ Offices across the country to ensure effective information 

sharing and investigative cooperation as permitted by law. And this approach is 

yielding significant results. Beginning with the implementation of Directive 144 

(and the expedited review procedures) and ending December 31, 2014, the Tax Division has authorized more than 975 SIRF investigations involving more than 1,700 

subjects. As a result, during the same period the Tax Division and the U.S. AttorVerDate Mar 15 2010 15:52 May 11, 2016 Jkt 000000 PO 00000 Frm 00047 Fmt 6601 Sfmt 6621 R:\DOCS\20033.000 TIMD
44 

neys’ Offices have brought more than 725 prosecutions involving more than 1,400 

individuals. 

The prosecution of SIRF crimes is a national priority, and, together with our law 

enforcement partners, we will continue to look for the most effective ways to bring 

this conduct to an end and to punish these wrongdoers. Indeed, enforcement efforts 

are critical, but the goal is to stop fraudulent refunds at the door. In the meantime, 

the Tax Division will continue to prosecute these cases and, in doing so, send a clear 

message to those who engage in this conduct that they will be held accountable for 

their actions. 

Thank you for the opportunity to provide the Department’s perspective on this 

issue, and I look forward to answering any questions that you may have. 

PREPARED STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH

WASHINGTON—Senate Finance Committee Chairman Orrin Hatch (R–Utah) today 

delivered the following opening statement at a committee hearing on tax schemes 

and scams: 

The committee will come to order. 

The committee meets today to hear about growing criminal activity that is targeting taxpayers across the country. These criminal acts are perpetrated by thieves 

hiding behind telephone lines and computers, preying on honest taxpayers and robbing the Treasury of tens of billions of dollars every year. 

This must stop, and we are here today to hear from some of the federal and state 

officials on the front lines of the fight to catch these crooks and protect taxpayers. 

But first I want to talk about one case in particular, and one very large number. 

In this town—and especially right here on this committee—we often talk in hundreds of millions, billions, or even trillions of dollars. Some joke about a number 

being referred to as budget dust, even if the number has nine or ten zeros behind 

it. 

But let me tell you about a number that is truly stunning: $15,800. 

That’s $15,800 saved through hard work, sacrifice, and honest living. 

That’s $15,800 saved for the down payment of a new house for a growing family. 

And, that’s $15,800 in savings that was wiped away by criminals who use fear, 

confusion, and intimidation as their weapons. 

This is the story of the Degen family from Taylorsville, Utah, and I would like 

to play a news clip from KTVX, a Utah ABC affiliate, that tells their story. 

This is just one family, out of millions that have been targeted and thousands 

that have been victimized. And this is just one scam. 

But, make no mistake, taxpayers across the country are also facing identity theft 

in record numbers, account takeovers, and other criminal attacks. 

Once again, this must be stopped. 

Taxpayers must be more aware of the risks and better protected from attack. And 

these criminals must be found and brought to justice. I look forward to the testimony from our witnesses on today’s panel and to hearing more about how we can 

accomplish these goals.I’ll now turn it over to Senator Wyden for his opening statement. 

PREPARED STATEMENT OF ELLEN M. KLEM, DIRECTOR OF CONSUMER OUTREACH AND

EDUCATION, OFFICE OF THE ATTORNEY GENERAL, OREGON DEPARTMENT OF JUSTICE

Good morning. I’d like to begin by thanking Chairman Hatch, Ranking member 

Senator Ron Wyden and members of the Committee for allowing me the opportunity 

to testify today. My name is Ellen Klem and I am the Director of Consumer Outreach and Education for Oregon Attorney General Ellen Rosenblum. My job is to 

travel the state educating Oregonians on how to be savvy consumers and avoid 

being scammed by scammers and fraudsters. 

45 

Every week, I’m in a different city talking to a different group of Oregonians. For 

example, last week I was on the northern Oregon coast in Astoria, Oregon with Attorney General Rosenblum talking to a group of older Oregonians at the Clatsop Retirement Village, and next week I will be in Albany, Oregon talking to a group of 

retired teachers. 

Every day, I hear stories from our most vulnerable citizens about a wide variety 

of scams and frauds. To an unassuming Oregonian, these scams can be threatening, 

and quite frankly, scary. While fraudulent behavior, imposter phone calls and unofficial mail solicitations have always been a part of a scammer’s repertoire, today’s 

scammers use new tactics. 

Lately, my conversations with Oregonians have focused almost exclusively on the 

IRS imposter scam. This is a major headache for too many Oregonians. Looking to 

take advantage of people during a busy tax season, these scammers tell victims over 

the phone that they owe money to the IRS or Oregon Department of Revenue. The 

caller demands that the person pay the money immediately through a temporary 

debit card or a wire transfer. If the victim refuses to pay, they are threatened with 

arrest, deportation or suspension of a business or driver’s license. In many cases, 

the caller becomes aggressive and insulting. For a vulnerable Oregonian, this phone 

call can be devastating. 

In 2014, the IRS imposter scam topped Oregon’s list of consumer complaints. Last 

year, 1,340 Oregonians filed complaints with the Oregon Attorney General about 

this scam, nearly double the complaints as the next highest category. Victims of this 

scam reported losses totaling $77,137.09. Unfortunately, we know this is just the 

tip of the iceberg. Many scam victims do not even report their losses because they 

either don’t know whom to report to or are too ashamed that they have been 

scammed. For countless others, they may not even know they have been scammed. 

That is why I am here today; to bring you the voices of Oregonians who have lost 

money, time and a sense of security because of these scammers. In particular, I 

would like to tell you the stories of two of those victims and share what the Oregon 

Attorney General is doing to prevent this from happening to others. 

The first story I would like to share is that of a victim I’ll refer to as Diane. Last 

year she fell victim to the IRS imposter scam to the tune of $15,000, the largest 

loss reported to the Oregon Department of Justice in 2014. Diane, a woman in her 

late 50s, lives and works in Turner, Oregon, a small town with fewer than 2,000 

residents. On August 12, 2014 she received a message on her answering machine 

from a man claiming to be from the IRS and directing her to call him back at a 

Washington, D.C. phone number. She dutifully called him back and the person who 

answered her call proceeded to read her an affidavit for her arrest, threatened her 

with a fine of $25,000 and 18 months in prison, and told her she would be arrested 

later that day if she did not pay. Needless to say Diane was terrified. She feared 

for her job and her financial future, and begged for forgiveness. The scammer told 

her it was possible to settle the matter, but only if she paid $15,000 immediately 

by purchasing a pre-paid debit card at a local store. Hoping to avoid prison, and 

afraid of further consequences, Diane made the only choice she thought she had; she 

complied with the request—and she was out $15,000. 

Individuals like Diane who send money to the scammers aren’t the only victims 

of imposter scams. In September 2014, I was contacted by Marissa Phillips, a small 

business owner outside of Portland, Oregon whose employee, Linda, had fallen victim to an imposter scam. After sending a small amount of money to the scammers, 

Linda realized her mistake and stopped answering the phone. But the scammers refused to give up. They kept calling. And, when it was clear that she wasn’t answering the phone, the scammers began calling Marissa’s small business; a business that 

provides in-home services for seniors and persons with disabilities. When Marissa 

called me, she reported that the scammers had called her business at a rate of 100 

phone calls per minute for 20 minutes; that’s 2,000 phone calls in less than half an 

hour. All the calls from scammers prevented the small business from providing help 

to those that actually needed it. The seniors, their families, hospitals, doctors and 

other staff could get nothing more than a busy tone when they called for assistance. 

Ultimately, the business was forced to change its phone number, and all of its marketing materials, incurring a significant cost. 

While this scam can seem daunting, thankfully not everyone in Oregon who receives a phone call from an IRS imposter will fall victim to the scam. I’d like to 

think that’s because we have been working so hard to educate all Oregonians, especially our most vulnerable. 

46 

The Oregon Attorney General has several educational tools aimed at scam prevention, because she and I both know that well-informed Oregonians are more likely 

to recognize fraud and less likely to become victims. We also know these scams can 

be hard to track and prosecute. 

Because education is so critical, we have a number of resources available for consumers, including: 

• A brochure with ten tips to protect you and your family from scams, 

• A toll-free complaint hotline that is staffed 5 days a week with some of 

the most knowledgeable volunteers in the state, 

• An easy to remember website—www.oregonconsumer.gov, 

• A searchable online consumer complaint database called Be InfORmed, 

and 

• Scam Alerts sent via email, our website, and Twitter. 

But our educational efforts do not stop there. We also have an entire section of 

the Oregon Department of Justice devoted to financial fraud and consumer protection. 

The 34 employees of the Consumer Protection & Financial Fraud section received 

50,000 phone calls in 2014 alone and receives nearly 8,000 written consumer complaints every year. Last year alone, this section opened more than 80 formal investigations and, at any given time, they are working on 220 open investigations. 

That is why we have also invested in strong partnerships with federal, state, and 

local government entities and officials, tribes, community organizations, advocacy 

groups, and members of the media. Through these partnerships we’re able to share 

complaints, coordinate investigations, and disseminate information to the public. 

Our partners give us a bigger voice to share information and keep Oregonians safe. 

In fact, one of our most successful partnerships is the Social Services Fraud Working Group, which meets monthly. The work group—in existence since 2011—is multidisciplinary and comprised of more than 30 federal, state, and local agencies working fraud cases in the field of social services. At each meeting, members of the work 

group share tips and work collaboratively to fight social services fraud. The success 

of the work group has spawned two additional workgroups, one in Alaska and another in Washington state. 

Unfortunately, Oregon is not unique in the number of reported scams. IRS imposter scam complaints are up nationally. Scammers target everyone, but especially 

older adults and other vulnerable individuals; they will not stop until they are 

caught and brought to justice. Unfortunately, that proves to be a challenge. 

We look forward to continuing our collaboration with the IRS, the FTC, and other 

federal agencies like the Office of the Inspector General of the Social Security Administration that hosts our Social Services Fraud Work Group. 

This concludes my testimony. Again, thank you Chairman Hatch, Ranking member Senator Ron Wyden and members of the Committee for inviting me today. I am 

available to answer questions. 

PREPARED STATEMENT OF HON. JOHN L. VALENTINE, CHAIRMAN, UTAH STATE TAX COMMISSION

Mr. Chairman and esteemed members of the Senate Finance Committee, I come 

before you this morning to discuss and recommend actions that can be taken to reduce the contagion of tax fraud which is sweeping the country. 

There are four issues for your consideration this morning: 

1. Strengthen information sharing between the IRS and the States. 

2. Stricter regulation of the financial industry as it relates to ‘‘pre-paid’’ debit 

cards. 

3. Prohibit the practice of applying refunds to payment of fees for filing services, 

a practice sometimes called ‘‘Refund Transfer.’’ 

4. Require third party filing services to tighten front end security by using multifactor authentication and other measures to secure data from unauthorized disclosure and identity theft. 

47 

Prior to the commencement of the 2015 filing season, Utah installed a state of 

the art computer software system to identify potentially fraudulent returns. On January 20 of this year, the Utah Tax Commission opened filing of income tax returns 

and deployed this system. As we began to process returns, our system started sending out verification letters to taxpayers whose returns appeared suspicious. Within 

ten days of the opening of the filing season, we began receiving calls from taxpayers 

who had received our communication about their return; they had not yet filed their 

returns. 

We initially thought these were isolated incidents, but they were not. As that 

week progressed, our software identified more and more suspicious returns. We 

found several factors that were the same in all the suspicious returns: 

• All the suspicious returns had the direct deposit information changed from the 

previous year’s bank account to prepaid debit cards, often Green Dot brand 

debit cards. 

• All the suspicious returns contained routing and account numbers that differed 

between the federal return and the state return. 

• Most of the suspicious returns appeared to have the exact 2013 tax return data 

populated to the fraudulent 2014 return. 

• The address on the suspicious returns was the same as the address on the 2013 

return. 

• Since most of these filings were being made through the Turbo Tax system, it 

appeared that something in their process was compromised. 

After communicating with the owners of Turbo Tax, (Intuit), and notifying other 

states through our national organization, we notified the Internal Revenue Service 

of the possible compromise of the Modernized Electronic Filing (MEF) systems. The 

accounts in question were immediately sent to the IRS for review. On February 10, 

2015, we sent 31 returns to the Ogden IRS Service Center that we had verified by 

contact with the taxpayers as being fraudulent. As of the date of this testimony, the 

IRS has not contacted us with the results of any determinations on their part of 

the nature of the returns. They did inform us in a phone conversation that they had 

known about a filing scheme which took a previous year’s return and copied it into 

a current year’s filing. The IRS representative stated that they had known about 

this scheme since last year, but had not notified the states of this fact. 

Many have asked what action was undertaken by the state of Utah when it discovered this attack. In short, we hurried. 

• We stopped all refunds until we could analyze the magnitude of the problem. 

• During the first week, we identified five different repeating fraud schemes. 

• We identified the returns with specific characteristics that were potentially 

fraudulent. 

• We deployed our identity quiz system and commenced sending ‘‘ID verification 

letters’’ on the returns that met the unique characteristics of potential fraud. 

• If the taxpayer failed the quiz, they were instructed to send us certain documentation to verify their identity, that included: 

Two forms of identification such as SSA card, passport, drivers license, state 

ID card, government issued photo ID, utility bill, bank statement, payroll 

stub, college transcript or insurance policy, and 

One picture ID. 

• If the taxpayer does not respond to the quiz or fails to provide the needed information, the system will reverse the return as though it had not been filed. 

• To the extent we could identify them, refund deposit requests to pre-paid debit 

cards have been converted to a paper warrant (check) and sent to the taxpayer’s 

address. 

As we continue to prevent the outflow of fraudulent refunds, we found great difficulty in determining the nature of financial institution routing and account information. We specifically found that there was no uniformity in numbering to distinguish traditional checking accounts and savings accounts from prepaid debit cards. 

For example, a prepaid reloadable debit card sold by Green Dot, appears to be 

linked to a bank account even though the debit card had no actual checking or savings account associated with it. (These cards may even appear as a Visa or Master 

48 

1 An ABA routing transit number is a nine digit code which identifies the financial institution 

on which it was drawn. It was originally used to facilitate sorting, bundling, and shipment of 

paper checks back to the drawer’s (check writer’s) account. As new payment methods were developed (ACH and Wire), the system was expanded to accommodate these payment methods. 2Green Dot maintains that it is compliant with Federal money laundering laws and with all 

Patriot Act elements. 

Card.) Quoting from their card holder’s agreement: ‘‘Your card is a prepaid debit 

Visa or MasterCard card, which means that you must add funds or ‘load’ your card 

in order to use it. There is no credit line associated with your Card.’’ Once the funds 

are transferred to such cards, they cannot easily be traced or recovered, a perfect 

vehicle to commit fraud. A simple fix would be to require a different series, letter 

or additional numbers to distinguish these cards from cards connected to bank or 

credit union checking and savings accounts.1

To obtain a Green Dot re-loadable prepaid Visa or MasterCard debit card, a customer is required to provide their name, address, date of birth, Social Security number, phone number, and other information that will allow Green Dot to identify customers.2 If a Green Dot customer is pretending to be someone else by assuming that 

person’s identity, then the identity thief has successfully obtained a fraudulent 

method to gain access to resources or other benefits in that person’s name without 

the use of a traditional bank account. Perpetrators then use these fraudulently obtained pre-paid debit cards to make thousands of dollars’ worth of retail purchases, 

quickly cash them out or drain them at an ATM. Prepaid debit cards appear to be 

preferable to fraudsters because the identity thief doesn’t have to bother with banks, 

credit unions or check-cashing stores that may become suspicious when one person 

starts bringing in multiple tax refund checks to be cashed or deposited. 

While we progressed though the investigation, we found a practice that enables 

fraudsters to perpetrate fraud without having anything at risk, a practice called ‘‘refund transfers.’’ Here is how it works: The fraudster is allowed to deduct the third 

party filing fees from the refund. The third party filing service gets paid, the 

fraudster receives the refund and the state and federal government (and potentially 

the taxpayer who may actually be entitled to a refund) are out the funds. 

Finally, we found third party filing services often lack the front end security 

measures necessary to protect their users in this cyber world. At a minimum, these 

services should install multi-factor authentication to assure that a person filing a 

tax return is indeed the person identified on the return. Quality fire walls and other 

data protections are a given, but since we are uncertain at this time of how the 

prior return information was obtained, it is a careful company, concerned about 

their product and its customers, that will invest the funds necessary to protect their 

data from cyber thieves. 

Unfortunately, prepaid debit cards cannot be specifically identified by routing 

numbers or bank account numbers using the present standardized methods. A 

standardization of routing or account numbers to include identification of prepaid 

debit cards would facilitate evaluation of suspicious filers and enhance the ability 

of Federal and State taxing authorities to deny refunds to the fraudsters and catch 

fraudulently filed income tax returns. 

PREPARED STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON

Since the day the IRS opened its doors, scam artists have been hatching up slick 

new ways of stealing taxpayer dollars from the Treasury. What’s new is, they’re now 

stealing Americans’ identities and personally threatening them on an industrial 

scale, while directly robbing them of their hard-earned money. The fraudsters dream 

up new tactics and milk them for all they’re worth before they start getting caught. 

Then it’s lather, rinse, repeat. Onto the next scam, always one step ahead of the 

law. 

Today the committee will closely examine several of the fraudsters’ latest strategies that are plaguing taxpayers. The one that’s hitting my home state of Oregon 

hardest is the fake phone call demanding money or personal information on behalf 

of the IRS. In fact, these calls were the number one consumer complaint registered 

with the Oregon Department of Justice last year. Not everybody knows the IRS simply does not cold-call people making demands or threats. So it’s pretty clear from 

my vantage point that there’s a lot more work to be done taking on this scourge. 

49 

Given the sophistication of this criminal activity and the fact that a lot of it comes 

from overseas, this sure looks to me like an emerging type of organized crime. So 

the real question is, what’s it going to take to root it out and put the bad actors 

on the sidelines? How about more prosecutions, stronger deterrents, or more cops 

on the beat? And what’s the best way of getting the word out so that taxpayers 

aren’t tricked into surrendering their life savings to some intimidating voice on the 

other end of the phone line? 

But even if people manage to avoid the phone calls, you can bet the crooks are 

finding other ways to profit. Tax preparation software has become the scammer’s 

new fast lane. These sharks manage to acquire a taxpayers’ personal data from the 

black market or hack into commercial databases, and they file false returns electronically. The victims may not find out until much later in tax season, and by then 

it’s too late. Already there have been thousands of reports like this in 2015. As we’ll 

hear today, some software vendors aren’t doing enough to help prevent fraud. 

In my view, part of the challenge is getting states, Internet tax services, and the 

IRS on the same wavelength. Everybody’s got to communicate and work together 

to make sure criminals can’t just nimbly slide from one jurisdiction to the next, as 

they rip off more unsuspecting Americans. 

Taxpayers may choose to avoid software, but not even a paid tax preparer is guaranteed to be safe. In fact, many of them don’t have to meet any standards for competence. There are far too many con artists out there willing and able to prey on 

the people who come through their doors. In some egregious cases, they secretly falsify their victims’ returns to boost the refunds, and they pocket the difference. And 

once tax season ends, the crooks disappear from the storefronts they occupied, leaving no trace of where they’ve gone. 

A few states, including Oregon, have rules in place to help shield taxpayers from 

this kind of scam. But most states don’t. Senator Cardin and I introduced the Taxpayer Protection and Preparer Proficiency Act at the beginning of this Congress to 

give all Americans the security they deserve. Our colleague Senator Nelson is also 

a leader on this issue of keeping taxpayers safe from identity theft and fraud. And 

I’m sure they share my desire to take on these challenges on a bipartisan basis. 

There is no end to the ingenuity of tax scam artists. My hope this morning is that 

we’ll get more fresh ideas for catching up to this wave of fraud and stopping it. That 

can’t come soon enough. So I’m looking forward to talking with our witness panel 

here today, which I’m very happy to say includes Ms. Ellen Klem, the director of 

consumer outreach and education in the Oregon Attorney General’s office. Thank 

you, Ms. Klem and all our witnesses, for being here during a time of year that’s 

busy for all of you. 

(51) 

COMMUNICATION

LETTER SUBMITTED FOR THE RECORD BY OPERATION HOPE 

March 11, 2015 

Honorable Mike Crapo 

Chairman 

Senate Subcommittee on Taxation and IRS Oversight 

219 Dirksen Senate Office Building 

Washington, D.C. 20510 

Honorable Robert P. Casey, Jr. 

Ranking Member 

Senate Subcommittee on Taxation and IRS Oversight 

219 Dirksen Senate Office Building 

Washington, D.C. 20510 

Dear Chairman Mike Crapo and Ranking Member Robert Casey: 

Operation HOPE is dedicated to financial empowerment for everyone in American 

society, and believes deeply that the expansion of the middle class depends on financial literacy and financial opportunity for lower income people so they can improve 

their lives and their futures. This year marks the 9th year for the advocation of IRS 

Earned Income Tax Credit Awareness (EITC) by Operation HOPE. Since 2006, we 

have worked to promote the EITC Program and there are many challenges we face 

to achieve this, but among them is the potential for an additional burden that efforts to combat tax fraud may have on the most vulnerable citizens. 

Cyber fraud attacks on financial systems in the United States are a major threat 

for our government and our institutions. But these also represent a major threat 

to people. The human side of financial and tax fraud is deeply concerning, not only 

in terms of innocent people being victimized by fraudsters, but also by being inadvertently caught up in government battle tactics as the war against fraud is waged. 

The IRS Taxpayer Advocate has written in multiple Annual Reports to Congress 

about innocent taxpayers being victims, both coming and going, in the story of tax 

fraud. She specifically addressed the problems of law-abiding individuals and families whose tax refunds have been held up or frozen by Government, suffering hardship and unnecessary financial crisis. She also warns of innocent citizens having 

their returns incorrectly flagged for investigation as the result of imprecise or overly 

sensitive anti-fraud filters and screens. Her reports should serve as a warning to 

carefully consider tactics as we consider how to go about ridding our tax system of 

fraud. 

There is much recent talk about imposing requirements or encouraging the tax industry to help Government by identifying and flagging suspect returns, and Government increasing its fraud defenses to stop suspicious returns, freeze refunds, and 

investigate filers. While effective strategies for fighting fraud do require private sector cooperation with Government, there are also inherent risks to our citizens from 

a tax system dominated by fear of fraud and not balanced by concern for rights. It 

will not be a successful strategy for private industry to voluntarily or by government 

order act like deputized U.S. Marshalls, effectively making ‘‘citizen’s arrests.’’ Doing 

so places businesses in the position of improperly investigating and reporting their 

customers to the IRS—essentially extending the policing powers of the government 

directly into the private sector. 

52 

Those working to escape poverty, as well as the underserved and the struggling 

middle class, deserve better than to be profiled, whether economically or by the circumstances of their lives. Those pulling themselves up the bottom rungs of the economic ladder should not be treated as a suspect class, targeted for either greater 

tax compliance burdens than the rest of the population, or flagged as a targeted 

population for tax examination and investigation. Claiming the Earned Income Tax 

Credit should not mark the citizen for suspicion, nor for imposition of heavier compliance burdens and costs. 

In the tax context, this means we cannot embed an assumption in our voluntary 

compliance tax system that taxpayers should be treated as if they are guilty until 

proven innocent. 

We know your Subcommittee will appropriately review the threat of tax fraud not 

only in the context of the security of our tax system, but in the necessity to avoid 

collateral damage to innocent people, swept up in broad and imprecise identification 

for investigative and enforcement activity based solely on computer algorithms. 

We urge the Subcommittee to diligently examine and question both public and private strategies to satisfy itself that we stay true to our values as we combat wrongdoing. The tax industry needs rational regulations and standards on how this fight 

should be fought, and Government needs active oversight and accountability to ensure fairness and decency. Congress needs, through its Oversight, to ensure that we 

are not losing our values as we work to combat wrongdoing. 

We stand ready to assist and support the Subcommittee in any way that might be 

helpful in your pursuit of these critical concerns on behalf of honest taxpayers, who 

represent the overwhelming majority of the tax a in public in this country. 

All the best and . . . 

With HOPE, 

John Hope Bryant 

Founder, Chairman and Chief Executive Officer 

www.operationhope.org 

Æ