TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION 

Detection Has Improved; However, 

Identity Theft Continues to Result in 

Billions of Dollars in Potentially 

Fraudulent Tax Refunds 

September 20, 2013 

Reference Number: 2013-40-122 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process 

and information determined to be restricted from public release has been redacted from this document. 

Redaction Legend: 

2 = Risk Circumvention of Agency Regulation or Statute 

Phone Number | 202-622-6500 

E-mail Address | TIGTACommunications@tigta.treas.gov

Website | http://www.treasury.gov/tigta
HIGHLIGHTS

DETECTION HAS IMPROVED; In addition, TIGTA expanded its Tax Year 2011 

HOWEVER, IDENTITY THEFT analysis to include tax returns for which the 

CONTINUES TO RESULT IN BILLIONS primary Taxpayer Identification Number on the 

OF DOLLARS IN POTENTIALLY tax return is an Individual Taxpayer Identification 

Number (ITIN). TIGTA identified more than FRAUDULENT TAX REFUNDS 141,000 Tax Year 2011 tax returns filed with an 

Highlights

ITIN that have the same characteristics as 

IRS-confirmed identity theft tax returns involving 

an ITIN. Potentially fraudulent tax refunds 

issued for these undetected tax returns totaled Final Report issued on approximately $385 million. September 20, 2013. Lastly, the IRS has still not taken actions to 

Highlights of Reference Number: 2013-40-122 prevent multiple tax refunds from being 

to the Internal Revenue Service Commissioner deposited to the same bank account. This 

for the Wage and Investment Division. continues to provide identity thieves with an 

easy method to obtain fraudulent tax refunds.

IMPACT ON TAXPAYERS 

WHAT TIGTA RECOMMENDED 

Identity theft continues to be a serious and 

growing problem which has a significant impact TIGTA recommended that the Commissioner, 

on tax administration. Undetected tax refund Wage and Investment Division: 1) deactivate 

fraud results in significant unintended Federal ITINs assigned to individuals prior to 

outlays and erodes taxpayer confidence in the January 1, 2013, who no longer have a tax filing 

Federal tax system. requirement in an effort to reduce tax filing fraud 

and 2) continue to analyze the characteristics of 

WHY TIGTA DID THE AUDIT identity theft tax returns, including using the 

characteristics of questionable ITIN application This review is a follow-up to a July 2012 TIGTA data to expand identity theft filters. audit report, There Are Billions of Dollars in 

Undetected Tax Refund Fraud Resulting From IRS management agreed with TIGTA’s 

Identity Theft (Reference No. 2012-42-080). recommendations. An implementation team is 

The overall objective of this review was to addressing the deactivation process for ITINs 

determine whether the IRS has improved its issued prior to 2013 and is developing an 

programs and procedures to identify and prevent enterprisewide process to accomplish that 

fraudulent tax refunds resulting from identity objective. In addition, during the 2012 and 2013 

theft. Filing Seasons, the Taxpayer Protection 

Program identified opportunities for WHAT TIGTA FOUND improvement to the filter processes and 

Our review found that expanded identity theft implemented changes that improved their 

detection efforts are helping identify fraudulent performance and effectiveness. The IRS plans 

tax returns. However, billions of dollars in to continue to evaluate the feasibility and impact 

potentially fraudulent refunds continue to be of changes to the Dependent Database filters 

paid. Our analysis of Tax Year 2011 tax returns and ITIN Real-Time System. 

identified approximately 1.1 million undetected 

tax returns filed using a Social Security Number 

that have the same characteristics of 

IRS-confirmed identity theft tax returns. 

Potentially fraudulent tax refunds issued total 

approximately $3.6 billion, which is down by 

$1.6 billion compared to the $5.2 billion TIGTA 

reported for Tax Year 2010. 
DEPARTMENT OF THE TREASURY 

WASHINGTON, D.C. 20220

TREASURY INSPECTOR GENERAL 

FOR TAX ADMINISTRATION 

September 20, 2013 

MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION 

FROM: Michael E. McKenney 

Acting Deputy Inspector General for Audit 

SUBJECT: Final Audit Report – Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in Potentially Fraudulent Tax 

Refunds (Audit # 201240044) 

This report presents the results of our review to determine whether the Internal Revenue Service 

(IRS) has improved its programs and procedures to identify and prevent fraudulent tax refunds 

resulting from identity theft. This review is a follow-up to our July 2012 audit report, There Are 

Billions of Dollars in Undetected Tax Refund Fraud Resulting From Identity Theft.

1

 The review 

is included in our Fiscal Year 2013 Annual Audit Plan and addressed the major management 

challenge of Fraudulent Claims and Improper Payments. 

Management’s complete response to the draft report is included as Appendix VI. 

Copies of this report are also being sent to the IRS managers affected by the report 

recommendations. Please contact me if you have questions or Russell P. Martin, Acting 

Assistant Inspector General for Audit (Returns Processing and Account Services). 

 

1

 Ref. No. 2012-42-080. 
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Table of Contents 

Background .......................................................................................................... Page 1 

Results of Review ............................................................................................... Page 3 

Expanded Identity Theft Detection Efforts Are Helping to 

Identify Fraudulent Tax Returns; However, Billions of 

Dollars in Potentially Fraudulent Refunds Continue to Be Paid .................. Page 3 

**************************2*********************** 

***************************2******************* ........................ Page 5 

Individual Taxpayer Identification Numbers Are Sometimes 

Used to File Potentially Fraudulent Tax Returns .......................................... Page 9 

Recommendation 1: ........................................................ Page 11 

Continued Expansion of Identity Theft Filters Can 

Increase Detection of Fraudulent Tax Returns ............................................ Page 12 

Recommendation 2: ........................................................ Page 17 

Actions Still Have Not Been Taken to Prevent Multiple Tax 

Refunds From Being Deposited to the Same Bank Account ........................ Page 18 

Appendices 

Appendix I – Detailed Objective, Scope, and Methodology ........................ Page 22 

Appendix II – Major Contributors to This Report ........................................ Page 25 

Appendix III – Report Distribution List ....................................................... Page 26 

Appendix IV – Outcome Measures ............................................................... Page 27 

Appendix V – Glossary of Terms ................................................................. Page 29 

Appendix VI – Management’s Response to the Draft Report ...................... Page 31 
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Abbreviations 

e-file(d) Electronically file(d) 

IRS Internal Revenue Service 

ITIN Individual Taxpayer Identification Number 

PIN Personal Identification Number 

SSN Social Security Number 

TIGTA Treasury Inspector General for Tax Administration 
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Background 

Identity theft continues to be a serious and growing problem which has a significant impact on 

tax administration. Identity theft for the purpose of tax fraud occurs when an individual uses 

another person’s name and Taxpayer Identification 

Number1 (generally a Social Security Number 

(SSN)) to file a fraudulent tax return to obtain a 

fraudulent tax refund. Unscrupulous individuals are 

stealing identities at an alarming rate for this 

purpose. 

Many individuals who are victims of this type of identity theft may be unaware that their identity 

has been used to file fraudulent tax returns. The individuals victimized are typically those who 

are not required to file a tax return. Figure 1 provides a comparison of the total number of tax 

returns the Internal Revenue Service (IRS) confirmed to involve identity theft for Processing 

Years 2011 and 2012 as well as the fraudulent refunds prevented. 

Figure 1: Identity Theft Tax Returns Confirmed 

As Fraudulent in Processing Years 2011 and 2012 

Processing 

Year 

Number of Confirmed 

Identity Theft Tax Returns 

Fraudulent Tax Refunds 

Prevented From Being Issued 

2011 1,086,727 $ 7,972,883,955 

2012 1,841,144 $ 12,108,211,555 

Source: The IRS’s Refund Fraud and Identity Theft Global Report for Calendar Year 2012. 

The impact of identity theft on tax administration is significantly greater than the 

amount detected and prevented by the IRS 

While the number of fraudulent tax refunds the IRS detects and prevents is substantial, it does 

not know the full scope of the fraud. A July 2012 Treasury Inspector General for Tax 

Administration (TIGTA) report on identity theft found that undetected tax refund fraud results in 

significant unintended Federal outlays.2

 The issuance of fraudulent tax refunds erodes 

 

1

 See Appendix V for a glossary of terms. 

2

 TIGTA, Ref. No. 2012-42-080, There Are Billions of Dollars in Undetected Tax Refund Fraud Resulting From 

Identity Theft (Jul. 2012). 

Page 1

The Federal Trade Commission 

has reported identity theft as the 

number one consumer complaint 

since Calendar Year 2000. 
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

confidence in the Federal tax system and increases the burden on those taxpayers who comply 

with the tax laws. 

In the 2012 report, TIGTA concluded that, based on an analysis of Tax Year 2010 tax returns 

processed during the 2011 Filing Season, tax fraud by individuals filing fictitious tax returns 

with false income and withholding is significantly greater than what the IRS detects and 

prevents. Using characteristics of identity theft confirmed by the IRS, we identified 

approximately 1.5 million undetected tax returns with potentially fraudulent tax refunds totaling 

in excess of $5.2 billion. 

This review was performed as a follow-up review to the July 2012 TIGTA audit on identity theft, 

which was performed at the request of Senator Bill Nelson, Chairman of the Senate Finance 

Subcommittee on Fiscal Responsibility and Economic Growth. Senator Nelson also requested 

this follow-up review. This review was performed at the IRS Wage and Investment Division 

Accounts Management and Submission Processing functions in Atlanta, Georgia, during the 

period September 2012 through June 2013. We conducted this performance audit in accordance 

with generally accepted government auditing standards. Those standards require that we plan 

and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objective. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions based on our audit 

objective. Detailed information on our audit objective, scope, and methodology is presented in 

Appendix I. Major contributors to the report are listed in Appendix II. 

Page 2
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Results of Review 

Expanded Identity Theft Detection Efforts Are Helping to Identify 

Fraudulent Tax Returns; However, Billions of Dollars in Potentially 

Fraudulent Refunds Continue to Be Paid 

In response to our 2012 report, the IRS continues to expand its efforts to identify and prevent 

fraudulent tax refunds from being issued as a result of identity theft. Our analysis of Tax 

Year 2011 tax returns identified approximately 1.1 million undetected tax returns filed using 

SSNs that have the same characteristics of IRS-confirmed identity theft tax returns. Potentially 

fraudulent tax refunds issued total approximately $3.6 billion. Although these tax returns met 

the characteristics of IRS-confirmed identity theft cases involving the use of an SSN, some 

potentially fraudulent tax returns we identified could 

also be the result of nonreporting of income and 

withholding by the employer or an individual using 

his or her own SSN to file a fraudulent tax return. 

The amount of undetected potentially fraudulent 

refunds is down by $1.6 billion from the $5.2 billion 

we reported for Tax Year 2010. Despite the 

increased efforts, billions of dollars in potentially fraudulent tax refunds continue to be issued 

without detection. 

In addition, we expanded our Tax Year 2011 analysis to include tax returns for which the 

primary Taxpayer Identification Number on the return is an Individual Taxpayer Identification 

Number (ITIN). We identified more than 141,000 Tax Year 2011 tax returns filed with an ITIN 

that have the same characteristics as IRS-confirmed identity theft tax returns involving an ITIN. 

Potentially fraudulent tax refunds issued for these undetected tax returns totaled approximately 

$385 million. 

**********************************2*****************************************

**********************************2*****************************************

************************************2***************************************

***********************************2*****************************************

***********************************2***************************************

*************************2**************************. 

Page 3

TIGTA analysis of Tax Year 2011 

tax returns identified approximately 

1.1 million undetected tax returns 

with approximately $3.6 billion in 

potentially fraudulent refunds. 
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

The IRS continues to expand its identity theft detection efforts 

The IRS continues to improve its efforts for identity theft detection and prevention of fraudulent 

tax refund issuance. These efforts include: 

Expanding identity theft filters. The IRS first developed identity theft filters for use in 

Processing Year 2012. The filters are used to identify potentially fraudulent tax returns and 

prevent the issuance of refunds at the time tax returns are being processed. Tax returns identified 

via the filters are held during processing until the IRS can verify the taxpayer’s identity. If the 

individual’s identity cannot be confirmed, the IRS removes the tax return from processing. This 

prevents the issuance of a fraudulent tax refund. In Processing Year 2012, there were 11 filters3

that identified approximately 325,000 tax returns and prevented the issuance of approximately 

$2.2 billion in fraudulent refunds. In Processing Year 2013, the number of filters increased to 

more than 80. As of May 30, 2013, the IRS identified 151,010 tax returns and prevented the 

issuance of approximately $840 million in fraudulent tax refunds. This represents a 90 percent 

increase over the number that the IRS identified for the same period in Processing Year 2012.4 

Expanding account locks. The IRS continues to expand the number of tax accounts that it locks 

by placing an identity theft indicator on the individuals’ tax accounts. Between January 2011 

and May 2013, the IRS has locked approximately 10 million taxpayer accounts. Electronically 

filed (e-filed) tax returns using the SSN of a locked account will be rejected (the IRS will not 

accept the tax return for processing). As of May 31, 2013, the IRS has rejected 152,301 e-filed 

tax returns. Paper-filed tax returns will be processed; however, the tax returns will not post to 

the Master File due to the account lock, and a refund will not be issued. The IRS has stopped 

169,642 paper-filed tax returns and prevented the issuance of approximately $5.6 million5

 in 

fraudulent tax refunds since the inception of the lock.

Developing a process to cluster tax returns with the same address and/or direct deposit 

account numbers. We previously reported that a characteristic of some of the potentially 

fraudulent tax returns we identified was the use of the same address and/or the same direct 

deposit account. In response, the IRS developed a filtering tool that groups tax returns based on 

address, zip code, and/or bank routing number. The groupings are then filtered through various 

business rules to identify potentially fraudulent tax returns. Tax return clustering was not in 

place when the Tax Year 2011 tax returns we analyzed were processed. The filtering tool 

became operational in Processing Year 2013. As of May 30, 2013, the IRS indicated it had 

identified 154,302 tax returns and prevented the issuance of approximately $470 million in tax 

refunds. 

 

3

 These were filters that were implemented prior to April 15, 2012. 

4

 For the same period in Processing Year 2012, the IRS identified 79,273 tax returns and prevented the issuance of 

approximately $562 million in fraudulent tax refunds. 

5

 The IRS locked the majority of the 10 million accounts in December 2012; therefore, the increased benefit of 

refunds prevented should be realized during Processing Year 2013. 

Page 4
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Developing leads from its Identity Theft Clearinghouse. The Identity Theft Clearinghouse 

provides IRS Criminal Investigation with a central location to review and process identity theft 

leads. The Clearinghouse performs research on each lead to develop it for the field offices and 

ensure that an open investigation is not already underway. In addition, the Clearinghouse passes 

relevant information to the appropriate function to attempt to incorporate newly identified fraud 

characteristics into identity theft filters. As of May 31, 2013, the Clearinghouse has received 

more than 3,400 identity theft leads that have resulted in the development of 478 investigations. 

Expanding cooperation with local law enforcement. In April 2012, with the assistance of 

various law enforcement agencies, the IRS developed a pilot program to allow the IRS to share 

tax return information with law enforcement agencies with the consent of a taxpayer. This 

partnership, which is known as the Law Enforcement Assistance Program, has since been 

expanded to include all 50 States, the District of Columbia, Guam, the Northern Marianas 

Islands, Puerto Rico, and the U.S. Virgin Islands. This initiative provides a way for taxpayers to 

release their tax records to law enforcement agencies to attempt to find the identity thief through 

the review of their tax return. The law enforcement agency requests that the victim of identity 

theft fill out a waiver so that the IRS can release the tax return information filed by the identity 

thief to the law enforcement agency. As of May 30, 2013, the IRS has processed 2,731 waivers 

from 244 different law enforcement agencies. 

While the above efforts have increased the IRS’s detection of fraudulent tax returns and 

prevented the issuance of billions of dollars in fraudulent tax refunds, the IRS still does not have 

timely access to third-party income and withholding information needed to make substantial 

improvements in its detection efforts at the time tax returns are processed. 

**************************************2******************************************* 

*************************************2************************

Access to third-party income and withholding information is the key to enabling the IRS to 

prevent the continued issuance of billions of dollars in fraudulent tax refunds. The following 

shows one example of how the IRS can identify and prevent tax refund fraud when it has timely 

access to third-party information. 

In response to a recommendation made in our prior report, the IRS began matching Social 

Security benefit income and withholding reported on tax returns to information reported to the 

IRS by the Social Security Administration when tax returns are processed. Annually, in 

December, the IRS receives Forms SSA-1099, Social Security Benefit Statement, from the Social 

Security Administration. The Form SSA-1099 contains the beneficiary’s name, SSN, Social 

Security benefits received, and Federal income tax withholding. For Processing 

Year 2012, the IRS created a filter that uses the Form SSA-1099 information at the time tax 

returns are processed to identify potentially fraudulent tax returns. The IRS decreased the 

Page 5
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

number of undetected tax returns based on fraudulent Social Security benefit income by 

86 percent compared to the amount we previously reported. 

Figure 2 provides a comparison of the number of undetected potentially fraudulent tax returns 

involving Social Security income and withholding for Tax Year 2010 to the number we identified 

for Tax Year 2011. 

Figure 2: Comparison of Undetected Tax Returns 

Claiming Social Security Benefits and Withholding 

for Tax Years 2010 and 2011 

Undetected 

Tax Year 2010 

Tax Returns/Dollars

Undetected 

Tax Year 2011 

Tax Returns/Dollars 

Number of Tax Returns 93,142 12,993 

Total Refund Amounts $ 231,692,282 $ 62,856,556 

Source: TIGTA analysis of Tax Year 2010 and 2011 tax returns. 

The IRS would have been able to identify even more of the tax returns with fraudulent claims for 

Social Security benefits if it had been able to program this filter for use earlier in the 2012 Filing 

Season. Programming put in place at the beginning of the 2013 Filing Season included the entire 

Social Security record, which should enable the IRS to detect most tax returns reporting false 

Social Security benefits and withholding during the 2013 Filing Season. As of May 30, 2013, 

the IRS indicated it had identified 36,523 tax returns and prevented the issuance of 

approximately $184 million in tax refunds due to the Social Security filters. 

However, most of the third-party income and withholding information is not available until well 

after tax return filing begins. Legislation would be needed for changes to the filing deadlines for 

information returns. The deadline for filing most information returns with the IRS is March 31, 

yet taxpayers can begin filing their tax returns as early as mid-January each year. For the 

2013 Filing Season, the IRS received more than 88 million tax returns as of March 30, 2013. 

In April 2011, the IRS Commissioner introduced the IRS’s vision of an initiative that would 

allow matching of data on tax returns with data on third-party information returns at the time tax 

returns are processed. It is envisioned that this would reduce the number of erroneous refunds 

paid because it would allow the IRS to substantiate claims or entries made by the taxpayer on the 

tax return as they are filed. The IRS found that 91 percent of individual taxpayers receive one of 

three third-party information return types.6

 As such, those information returns would likely be 

 

6 ****************************************2*************************************************; 

*******************************************2*******************************. 

Page 6
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

the highest priority for any changes to expedite transmittal and access for use in processing tax 

returns. 

To date, the IRS has conducted stakeholder sessions to discuss the impact, opportunities, and 

constraints around earlier data matching. While most stakeholders agree this type of solution is 

needed, they are concerned that earlier reporting will lead to more errors in the data. For 

example, stakeholders raised concerns that several pieces of information on the income 

documents, such as tax on life insurance premiums, third-party sick pay, and State disability 

information, may not be available until after December 31. ********************2********

*************************************2***************************************

************************************2***************************************

**************************************2******************************. 

************************************2**************************************

*************************************2*************************************

************************************2**************************************

*************************************2**************************************

**********************************2************************. 

**********************************************2************************************************

 2** ******

Figure 3 provides a summary of our analysis, *******2*************************. 

Figure 3: ***************************2****************************** 

****************************************2********************************* 

******2******** 

*****2************ Tax Returns Refunds Issued 

 2** ** 802,672 $ 2,354,349,943 

***********2************* 12,993 $ 62,856,556

****************2********** 204,522 $ 698,118,714 

********2*********** 66,811 $ 497,081,019 

Total 1,086,998 $ 3,612,406,232 

Source: TIGTA analysis of Tax Year 2011 tax returns. 

Figure 4 identifies specific characteristics of the 1.1 million taxpayers whose SSNs were used on 

these tax returns. 

Page 7
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Figure 4: Characteristics of the Individuals Whose 

SSNs Were Used on Undetected Tax Returns 

Characteristic Tax Returns Refunds Issued 

Children (under age 14) 1,451 $ 2,036,064 

Citizens of U.S. Possessions 22,090 $ 113,799,479 

Deceased 19,102 $ 70,180,690 

Elderly (age 70 and over) 28,700 $ 136,320,008 

Income Level Does Not Require Tax Return 

Filing7 753,004 $ 2,632,240,181 

8 Prisoner 37,249 $ 133,087,550

Students (ages 16 to 22) 225,402 $ 524,742,260 

Total 1,086,998 $ 3,612,406,232 

Source: TIGTA analysis of Tax Year 2011 tax returns. 

When taxpayers file their returns after a fraudulent return has been filed, they 

often experience significant burden and delays 

For those individuals who are required to file a tax return, it is not until the legitimate individual 

files a tax return, resulting in a duplicate filing under the same name and SSN, that many 

individuals realize they are a victim of identity theft. When the identity thief files the fraudulent 

tax return before the legitimate taxpayer, the IRS does not yet know that the victim’s identity 

will be used more than once. Once the legitimate taxpayer files his or her tax return, this tax 

return is identified as a duplicate tax return and the refund is held until the IRS can confirm the 

taxpayer’s identity. For Tax Year 2011, we identified more than 174,000 SSNs that were used 

multiple times, i.e., one or more potentially fraudulent tax returns were associated with the 

multiple use of an SSN.9

 We estimate that approximately $183 million in potentially fraudulent 

tax refunds were paid to identity thieves who filed tax returns before the legitimate taxpayers 

filed theirs.10 This is in addition to the $4 billion11 noted previously, which is related to taxpayers 

who do not appear to have a filing requirement. 

 

7

 This category contains tax returns filed with income claimed for which there is no supporting income documents 

that would indicate the legitimate taxpayers did not have a tax return filing requirement. 

8 We plan to conduct a separate review to evaluate the IRS’s efforts to improve the detection and prevention of 

prisoner tax fraud later this fiscal year. 

9

 This estimate includes only those tax returns filed on tax accounts that contain an identity theft indicator added on 

or before December 31, 2012. 

10 This estimate is based only on the duplicate use of the primary SSN when the tax refund was reversed. 

11 The $4 billion represents $3.6 billion in refunds for tax returns filed using an SSN and $385 million in refunds for 

tax returns filed using an ITIN. 

Page 8
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Individual Taxpayer Identification Numbers Are Sometimes Used to 

File Potentially Fraudulent Tax Returns 

Our analysis identified 141,062 tax returns filed for Tax Year 2011 by individuals using an ITIN 

that had characteristics of IRS-confirmed identity theft tax returns. These returns resulted in the 

issuance of approximately $385 million in potentially fraudulent tax refunds. Although these tax 

returns had the characteristics of IRS-confirmed identity theft cases involving the use of an ITIN, 

some of the potentially fraudulent tax returns we identified could also be the result of 

misreporting of income and withholding by the employer or an individual obtaining an ITIN for 

the sole purpose of using the ITIN to file a fraudulent tax return. 

There were 141,287 Taxpayer Identification Numbers used on the Forms W-2, Wage and Tax 

Statement, associated with the 141,062 tax returns. ********************2***************

**********************************************2******************************

**************************************************2************************ 

***********************2****************************. 

Any person required to file a tax return must include an identifying number, referred to as a 

Taxpayer Identification Number. For the majority of filers, this is the individual’s SSN. The 

IRS created the ITIN to provide a Taxpayer Identification Number to individuals who do not 

have and are not eligible to obtain an SSN. IRS guidelines specify that an ITIN is to be used for 

Federal income tax purposes only and is not valid for work. As with SSNs, ITINs are specific to 

individuals and should be issued to and used by only one individual. 

************************************2***************************************

****************************************2*********************. To identify the 

potentially fraudulent tax returns, we matched the Taxpayer Identification Number under which 

the income was reported on the tax return to the Forms W-2 the IRS receives from the Social 

Security Administration. **************************2******************************

******************************************2******************************* 

******************************************2**********************************

*****2**********************. Figure 5 identifies specific characteristics of the Taxpayer 

Identification Numbers under which the income and withholding were reported on the tax returns 

we identified. 

Page 9
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Figure 5: Characteristics of the Taxpayer Identification Numbers 

Used to Report Income on the Undetected Tax Returns

Characteristic 

Taxpayer Identification Numbers 

Used on Forms W-2 

Child (under age 14) 5,760 

Citizens of U.S. Possessions 462 

Deceased Individual 3,527 

Elderly Individual (age 70 and over) 2,494 

12 IRS-Issued Identification Number 101,680 

Prisoner 109 

Student (ages 16 to 22) 12,615 

13 Individuals Not in Above Categories 14,640 

Total 141,287 

Source: TIGTA analysis of Tax Year 2011 tax returns.

In a July 2012, TIGTA reported that the IRS has not established processes to identify and 

deactivate ITINs.14 For example, the IRS regularly receives data from the Social Security 

Administration15 identifying the SSNs of deceased individuals to enable the IRS to verify 

identity, prevent fraud, and comply with the USA PATRIOT Act.16 However, the IRS has not 

established a process to identify ITINs of deceased individuals or individuals who no longer have 

a valid tax-related purpose so that those ITINs can be deactivated. The ITIN is intended for tax 

purposes only and creates no inference regarding an alien individual’s right to be legally 

employed in the United States or that individual’s immigration status, i.e., the ITIN does not 

authorize a foreign individual to work or live in the United States. An ITIN remains valid 

indefinitely, even if not used on a tax return or for other tax-related purposes. 

 

12 This category consisted primarily of ITINs, but there were 550 Internal Revenue Service Numbers. 

13 The Taxpayer Identification Numbers in this category did not have identifiable characteristics that would indicate 

the taxpayer may not have a filing requirement. 

14 TIGTA, Ref. No. 2012-42-081, Substantial Changes Are Needed to the Individual Taxpayer Identification 

Number Program to Detect Fraudulent Applications (Jul. 2012). 

15 The Social Security Administration maintains a Death Master File containing records of more than 65 million 

deaths, giving information on each decedent such as name, SSN, date of birth, and date of death. The Death Master 

File is one of the Government’s most effective tools against financial fraud. 

16 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism 

Act of 2001, Pub. L. 107-56, 115 Stat. 272. Also known as the USA PATRIOT Act. 

Page 10
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

We recommended that the IRS develop a process to identify and deactivate ITINs assigned to 

individuals who no longer have a tax filing requirement. In response, the IRS stated that ITINs 

issued after January 1, 2013, will expire after five years. Individuals who still need an ITIN after 

the five-year expiration will have to reapply. Furthermore, the IRS continues to explore options 

for deactivating ITINs assigned to individuals prior to January 1, 2013, who no longer have a tax 

filing requirement. Based on our analysis, we believe the IRS should not delay in its 

development of such a process because ***************2***************************

************************2***********************. Implementing such a process will 

assist the IRS in reducing the likelihood that the ITIN can be used to file a fraudulent tax return. 

Figure 6 provides a breakdown relating to the assignment year of the ITINs used on the 

potentially fraudulent tax returns we identified. It shows those ITINs assigned over five years 

ago and those assigned within the last five years. 

Figure 6: Analysis of ITIN Assignment Year for ITINs 

Used to File Undetected Potentially Fraudulent Tax Returns 

ITIN Assignment Tax Year Tax Returns Refunds Issued 

ITINs More Than 5 Years Old 84,821 $ 216,932,792 

ITINs 5 Years Old or Less 56,241 $ 167,605,923 

Total 141,062 $ 384,538,715 

Source: TIGTA analysis of Tax Year 2011 tax returns and the IRS’s Real-Time System.

Recommendation 

Recommendation 1: To reduce the potential for tax filing fraud, the Commissioner, Wage 

and Investment Division, should implement a process to deactivate ITINs assigned to individuals 

prior to January 1, 2013, who no longer have a tax filing requirement. 

Management’s Response: IRS management agreed with this recommendation. An 

implementation team is addressing the deactivation process for ITINs issued prior to 

2013 and is developing an enterprisewide process to accomplish that objective. 

Office of Audit Comment: IRS management agreed with our recommendation, but 

did not agree to the related outcome measure. IRS management’s response assumes that 

employer noncompliance with reporting requirements may account for a significant 

portion of the tax returns we identified. However, as we detail in the report, each of the 

141,062 tax returns had the characteristics of IRS-confirmed identity theft cases 

involving the use of an ITIN. Furthermore, our analysis of the Employer Identification 

Numbers on the Forms W-2 associated with the potentially fraudulent tax returns found 

Page 11
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

that over 90 percent belonged to businesses that had submitted Forms W-2 for other 

individuals. 

IRS management indicated they will develop an enterprise-wide process to deactivate 

ITINs issued prior to January 1, 2013. Nonetheless, they note that such a process will not 

be in place until 2017. As noted in our report, we believe this delay will contribute to the 

continued loss of potentially $385 million annually until the process is in place. 

Continued Expansion of Identity Theft Filters Can Increase Detection 

of Fraudulent Tax Returns 

The IRS uses characteristics of confirmed identity theft cases to build filters to identify other 

fraudulent tax returns. The IRS’s success at identifying fraudulent tax returns and preventing the 

issuance of fraudulent tax refunds continues to increase with the expansion of these filters. The 

identity theft filters incorporate criteria based on characteristics of confirmed identity theft tax 

returns, ***********************************2**********************************

******2*************. Below are key characteristics of the 1.2 million undetected potentially 

fraudulent tax returns we identified. 

Tax returns signed by a paid preparer 

We identified that 357,235 (33 percent)17 of the 1.1 million potentially fraudulent tax returns 

using an SSN were signed by a paid preparer. These 357,235 tax returns involved 

107,161 preparers and had tax refund claims totaling approximately $1.2 billion. There 

were 114,669 (81 percent) of the 141,062 potentially fraudulent tax returns using an ITIN that 

were signed by a paid preparer. These 114,669 tax returns involved 19,655 preparers and had 

tax refund claims totaling $308 million. Figure 7 shows paid preparers that filed multiple 

potentially fraudulent tax returns. 

 

17 Percentage is based on the actual number of 1,086,998 tax returns. 

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Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Figure 7: Tax Return Preparers Filing Most Undetected Tax Returns 

Undetected Tax Returns Filed Using an SSN 

Paid Preparer Number of Tax Returns Refunds Issued 

Preparer A18 5,506 $ 26,819,367 

Preparer B 1,747 $ 12,043,332 

Preparer C 1,746 $ 2,260,037 

Preparer D 881 $ 1,987,204 

Preparer E 819 $ 2,758,326 

Undetected Tax Returns Filed Using an ITIN 

Paid Preparer Number of Tax Returns Refunds Issued 

Preparer A 1,590 $ 4,044,810 

Preparer F 839 $ 2,409,816 

Preparer G 766 $ 5,142,053 

Preparer H 706 $ 2,129,543 

Preparer I 388 $ 930,565 

Total 14,988 $ 60,525,053 

Source: TIGTA analysis of Tax Year 2011 tax returns. 

Authenticating taxpayers remains a challenge for the IRS 

Although the IRS is working toward finding ways to determine which tax returns are legitimate, 

it could do more to prevent identity thieves from electronically filing (e-filing) tax returns. Of 

the 1.2 million potentially fraudulent undetected tax returns, more than 1.1 million (93 percent) 

were e-filed. Before a tax return can be e-filed, the taxpayer must verify his or her identity with 

the correct date of birth and either the prior year’s tax return Self-Select Personal Identification 

Number (PIN) or Adjusted Gross Income. However, we have determined that this control can be 

circumvented. If the taxpayer does not remember his or her information, he or she can go to 

IRS.gov, the IRS’s public Internet website, to obtain an Electronic Filing PIN. An Electronic 

Filing PIN is obtained by providing personal information that the IRS matches against data on 

the prior year’s tax return filed by the taxpayer. Alternatively, a taxpayer can call the IRS and 

follow automated prompts to receive an Electronic Filing PIN. 

 

18 This same preparer also filed 1,590 tax returns using ITINs. 

Page 13
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

For the 2013 Filing Season, the IRS has required the taxpayer to provide additional Personally 

Identifiable Information, including requiring the taxpayer’s address. Nonetheless, it remains a 

challenge for the IRS to authenticate taxpayers. For example, the IRS has not adopted industry 

practices of shared secrets, such as security challenge questions, to authenticate taxpayers, 

e.g., mother’s maiden name or the name of first pet. 

TIGTA analysis of more than 900,00019 undetected e-filed tax returns identified that taxpayers 

signed their tax return using the Self-Select PIN method for 508,210 (56 percent) of the returns. 

This method is required for any taxpayer filing a tax return using an online software package. 

An Electronic Filing PIN was provided for authentication for 150,683 (30 percent) of the 

508,210 tax returns signed using the Self-Select PIN method. 

The remaining 393,374 e-filed tax returns were prepared by a paid tax practitioner who chose 

and entered a PIN on behalf of the taxpayer or had the taxpayer create a PIN themselves. 

Taxpayers can authorize a practitioner (who is responsible for ensuring that the taxpayer is who 

they say they are) to sign the return for them by completing Form 8879, IRS e-file Signature, 

before the return is submitted to the IRS. 

Analysis of addresses used on the undetected tax returns 

Our analysis of undetected tax returns continues to identify commonalities in the addresses used 

on the potentially fraudulent tax return. As previously mentioned, the IRS developed a filtering 

tool that will use a clustering method which will include grouping tax returns based on address, 

zip code, and/or bank routing number to which a tax refund will be issued. These clusters will 

then be filtered through various business rules to identify potentially fraudulent tax returns. 

However, this filtering tool was not in place when the Tax Year 2011 tax returns we analyzed 

were processed. Figures 8, 9, and 10 provide examples of the commonalities we identified. 

 

19 We did not include more than 200,000 of the 1.1 million e-filed tax returns in this analysis because they were filed 

using a backup processing system, and we did not obtain a data extract of this information. 

Page 14
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Figure 8: Top Five Countries in the Mailing Address 

on Undetected Tax Returns20

Country Number of Tax Returns Refunds Issued 

Bulgaria 701 $ 490,735 

Lithuania 676 $ 228,993 

Ireland 657 $ 282,926 

China 443 $ 240,724 

Canada 337 $ 698,166 

Source: TIGTA analysis of Tax Year 2011 tax returns. 

Figure 9: Top Five Cities in the Mailing Address 

on Undetected Tax Returns 

City Tax Returns Refunds Issued 

Undetected Tax Returns Filed Using an SSN 

Miami, Florida 37,661 $ 147,386,612 

Chicago, Illinois 22,872 $ 70,635,832 

Detroit, Michigan 19,528 $ 70,367,655 

Atlanta, Georgia 18,586 $ 53,372,590 

Houston, Texas 16,437 $ 55,497,521 

Undetected Tax Returns Filed Using an ITIN 

Los Angeles, California 4,513 $ 9,204,059 

Las Vegas, Nevada 3,226 $ 10,025,227 

Houston, Texas 3,157 $ 7,456,065 

Chicago, Illinois 2,991 $ 7,285,481 

Phoenix, Arizona 2,315 $ 8,362,458 

Total 131,286 $ 439,593,500 

Source: TIGTA analysis of Tax Year 2011 tax returns. 

 

20 Tax returns filed using an ITIN are not included in this chart as there were only six of the 141,000 cases that were 

filed from another country. The top five countries presented are other than the United States. 

Page 15
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Figure 10: Top Five Addresses Used on Undetected Tax Returns 

Address Tax Returns Refunds Issued 

Undetected Tax Returns Filed Using an SSN 

Address 1 in Kaunas, Lithuania 655 $ 220,489 

Address 2 in Orlando, Florida 580 $ 870,253 

Address 3 in Lakewood, Colorado 355 $ 1,001,707 

Address 4 in Shanghai, China 343 $ 156,533 

Address 5 in Orlando, Florida 291 $ 466,409 

Undetected Tax Returns Filed Using an ITIN 

Address 6 in Santa Ana, California 240 $ 576,552 

Address 7 in Salinas, California 201 $ 785,793 

Address 8 in Mountlake Terrace, 

Washington 194 $ 554,866 

Address 9 in Milwaukee, Wisconsin 159 $ 858,981 

Address 10 in Sanford, North Carolina 127 $ 787,358 

Total 3,145 $ 6,278,941 

Source: TIGTA analysis of Tax Year 2011 tax returns. 

Addresses used on potentially fraudulent tax returns using an ITIN were also 

used by more than 5,000 individuals to obtain an ITIN 

We performed an additional analysis using the addresses shown on the undetected potentially 

fraudulent tax returns filed with ITINs that we identified. TIGTA previously reported that many 

individuals applying for ITINs using a Form W-7, Application for IRS Individual Taxpayer 

Identification Number, are using the same addresses to submit questionable ITIN applications. 

We matched the top five addresses used on the undetected potentially fraudulent tax returns we 

identified (addresses listed in Figure 10) to information contained in the IRS’s Real-Time 

System to determine how many ITINs were assigned to individuals using the same address as 

listed on the potentially fraudulent tax returns. For example, for Address 8 in 

Mountlake Terrace, Washington: 

 194 individuals filed potentially fraudulent returns with refunds issued totaling $554,866 

listing this as their address on the tax return (see Figure 10). 

 1,947 ITINs were assigned to individuals who listed this as their address on their ITIN 

application per information available in the IRS’s Real-Time System. 

Page 16
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Figure 11 shows the number of ITINs assigned to individuals using the same addresses we 

identified as being used on multiple undetected potentially fraudulent tax returns. 

Figure 11: ITIN Applications Assigned Using the Same Address 

As Addresses Used to File Potentially Fraudulent Tax Returns 

Address 

ITINs Assigned Using 

These Addresses 

Address 6 in Santa Ana, California 021

Address 7 in Salinas, California 39 

Address 8 in Mountlake Terrace, Washington 1,947 

Address 9 in Milwaukee, Wisconsin 1,841 

Address 10 in Sanford, North Carolina 1,287 

Total 5,114 

Source: TIGTA analysis of Tax Year 2011 tax returns and the IRS’s Real-Time System. 

We plan to evaluate the IRS’s success in using the clustering tool to group tax returns based on 

address, zip code, and/or bank routing number to which a tax refund will be issued. This 

evaluation will be part of our continued coverage of identity theft in Fiscal Year 2014 and our 

analysis of Tax Year 2012 tax returns. 

Recommendation 

Recommendation 2: The Commissioner, Wage and Investment Division, should continue to 

analyze characteristics of fraudulent tax returns resulting from identity theft to refine and expand 

identity theft filters used to detect and prevent the issuance of fraudulent tax refunds resulting 

from identity theft. This should include using the characteristics of questionable ITIN 

application data. 

Management’s Response: IRS management agreed with this recommendation. 

During the 2012 and 2013 Filing Seasons, the Taxpayer Protection Program identified 

opportunities for improvement to the filter processes and implemented changes that 

improved their performance and effectiveness. The IRS plans to continue to evaluate the 

feasibility and impact of changes to the Dependent Database filters and ITIN Real-Time 

System. The IRS will prepare a risk assessment that, in addition to determining the scope 

and costs of programming needed to automate the process, will address mitigating 

 

21 There were no ITINs assigned using this address on the ITIN application. 

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Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

controls that can be implemented in the event the requested programming changes are not 

funded. 

Actions Still Have Not Been Taken to Prevent Multiple Tax Refunds 

From Being Deposited to the Same Bank Account 

The inability of the IRS to ensure the accuracy of direct deposit account information continues to 

be a factor in the ease with which individuals can receive fraudulent tax refunds. Our analysis of 

the 1.2 million undetected Tax Year 2011 tax returns found that 1 million (84 percent) of the tax 

returns used direct deposit to obtain tax refunds totaling approximately $3.5 billion. As we 

previously reported, direct deposit, which now includes debit cards,22 is often used by identity 

thieves to obtain fraudulent tax refunds. ***********************2*********************

****************************************2************************************

****************************************2***********************************

*****************************************2********************************

*****************************************2*********************************

**************************2*******************. Each method of obtaining a debit 

card requires a different level of verification in order to acquire a card. 

**********************************2***************************************

**************2********. Individuals who request to have their tax refund deposited onto a 

debit card enter a bank account number and bank routing number provided by the debit card 

company on their tax return. *****************************2************************

*************2*************. In addition, each method of obtaining a debit card requires a 

different level of verification in order to acquire a card. To open a bank account, an individual 

generally must present at least one form of identification such as a driver’s license or other 

picture identification. 

A prior TIGTA report recommended that the IRS limit the number of tax refunds 

sent to the same account 

The problem we identified in our previous analysis of Tax Year 2010 tax returns is still evident; 

multiple Tax Year 2011 tax refunds continue to be deposited into the same bank account(s). 

Figure 12 shows the top direct deposit accounts used multiple times. 

 

22 These include prepaid debit cards as well as reloadable cards. 

Page 18
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Figure 12: Analysis of Multiple Deposits to the Same Bank Account 

Direct Deposits Per Bank Account 

(one bank account per row) 

Tax Refunds 

Deposited to the Account 

Undetected Tax Returns Filed Using an SSN 

446 $ 591,447 

429 $ 531,204 

401 $ 499,964 

275 $ 344,767 

249 $ 244,112 

Undetected Tax Returns Filed Using an ITIN 

184 $ 833,670 

137 $ 628,672 

106 $ 310,532 

97 $ 243,119 

93 $ 377,978 

Source: TIGTA analysis of Tax Year 2011 tax returns. 

Our July 2012 report included four recommendations addressing the need to improve controls 

over direct deposit refunds. In its response to our report, the IRS stated that it is working with 

financial institutions to reject direct deposits of refunds from being made into accounts that 

belong to individuals who do not have the same name as shown on the tax return. The IRS has 

not taken any action to limit the number of refunds as recommended by TIGTA. Moreover, the 

IRS still has not developed a means to identify direct deposits of tax refunds to accounts 

associated with a debit card and still cannot ensure that financial institutions are authenticating 

the identity of individuals purchasing debit cards. Figure 13 details recommendations we made 

in our prior report to ensure the accuracy of direct deposits and actions the IRS has taken to date 

to address these recommendations. 

Page 19
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Figure 13: Report Recommendations and Corrective Actions 

the IRS Has Taken Related to Ensuring the Accuracy of Direct Deposits 

Recommendation Corrective Actions Taken to Date

Coordinate with 

responsible Federal 

agencies and banking 

institutions to develop a 

process to ensure that 

tax refunds issued via 

direct deposit are made 

only to an account in the 

taxpayer’s name. 

o

o

o

In January 2013, the IRS implemented a pilot program (Opt-In 

Program) with the Financial Management Service designed to allow 

financial institutions to reject direct deposit tax refunds based on 

mismatches between the account name and the name on the tax 

return. Once the refund is identified by the institution, it is sent back 

to the Financial Management Service to be routed back to the IRS. 

When the IRS receives the rejected refund, it will send a notice to the 

taxpayer explaining that the tax refund is being researched by the IRS. 

As of June 29, 2013, there have been 18,247 refunds returned from 

financial institutions totaling approximately $60 million. 

In July 2013, the program is planned to begin its second phase, in 

which financial institutions will be able to indicate to the IRS their 

reason for identifying the return as either identity theft or 

questionable/fraudulent. 

Limit the number of tax 

refunds issued via direct 

deposit to the same bank 

account or debit card 

account in an attempt to 

reduce the potential for 

fraud. 

o As of June 2013, the IRS is considering TIGTA’s recommendation. The 

IRS developed additional filters designed to identify and stop tax 

returns with similar direct deposit characteristics. These filters are 

being used in the 2013 Filing Season. 

Identify and quantify 

direct deposits of tax 

refunds to accounts 

associated with a debit 

card as well as develop 

the ability to associate 

tax refunds deposited to 

a debit card to a specific 

tax account. 

o

o

The IRS stated that financial institutions cannot currently distinguish 

between direct deposit account numbers for deposit accounts and 

prepaid debit cards. 

As of December 13, 2012, the IRS believes that it is under the same 

limitations as the financial institutions; thus, no further work has been 

completed on this recommendation. 

Ensure that financial 

institutions and debit 

card administration 

companies authenticate 

the identity of individuals 

purchasing a debit card. 

o

o

The IRS indicated that it does not have the authority to implement any 

restrictions or requirements on how financial institutions and debit card 

companies authenticate the identity of debit card holders. 

As of December 13, 2012, the IRS has stated that it has initiated 

discussion on this issue with various groups. 

Source: TIGTA analysis on status of prior TIGTA report recommendations. 

Page 20
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

As we previously reported, the IRS Return Integrity and Correspondence Services’ Integrity and 

Verification Operation23 has implemented a program in which the IRS works with financial 

institutions to obtain information on questionable tax refunds. The IRS refers to this program as 

the External Leads Program. The External Leads Program receives leads regarding questionable 

tax refunds identified by financial institutions, government and law enforcement agencies, State 

agencies, etc. For Processing Year 2013, the IRS is partnering with 201 financial institutions to 

identify and return questionable tax refunds. In Calendar Year 2012, the IRS recovered 

210,003 fraudulent tax refunds totaling more than $779 million through this program. This 

program relies on the banks to provide the IRS with much-needed information to identify 

potentially fraudulent tax refunds. We are currently conducting an audit to assess the 

effectiveness of the External Leads Program in recovering questionable tax refunds. 

 

 

23 The IRS Integrity and Verification Operation was formally known as the Accounts Management Taxpayer 

Assurance Program. The Integrity and Verification Operation name change was effective January 13, 2013. 

Page 21
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Appendix I 

Detailed Objective, Scope, and Methodology 

The overall objective of this review was to determine whether the IRS has improved its programs 

and procedures to identify and prevent fraudulent tax refunds resulting from identity theft. This 

review focused on identity theft related to tax refunds, which generally occurs when an 

individual uses another person’s name and SSN to file a fraudulent tax return in order to obtain a 

fraudulent tax refund. To accomplish the objective, we: 

I. Assessed the adequacy of the IRS’s implementation of corrective actions in response to 

our prior audit report.1 

A. Identified approximately 1.1 million potential tax returns filed by identity thieves for 

Tax Year2

 2011 based upon criteria used in our previous identity theft review. In 

addition, identified more than 141,000 Tax Year 2011 tax returns filed using an ITIN 

by potential identity thieves. 

1. Performed data analysis on Data Center Warehouse files and Strategic Data 

Services extracted data to identify potential identity theft tax returns filed for Tax 

Year 2011. We identified populations (over age, under age, deceased, etc.) 

vulnerable to identity theft who have filed for a refund for Tax Year 2011. 

2. Stratified identified populations by applicable fields such as income type, number 

of ITINs, multiple returns to one address, and multiple direct deposits into one 

account. 

3. Validated the reasonableness of our criteria by reviewing a judgmental sample of 

tax returns filed by taxpayers in each segment identified to determine if the tax 

returns appear to be fraudulent. 

B. Compared the Tax Year 2011 population of potential identity theft tax returns to the 

population identified during our previous identity theft review. 

II. Identified control breakdowns that continue to result in the issuance of fraudulent tax 

refunds resulting from identity theft that were identified in Step I. 

A. Using the characteristics of the tax returns identified in Step I, assessed the adequacy 

of the IRS’s implementation of corrective actions and whether inadequate 

 

1

 TIGTA, Ref. No. 2012-42-080, There Are Billions of Dollars in Undetected Tax Refund Fraud Resulting From 

Identity Theft (Jul. 2012). 2

 See Appendix V for a glossary of terms. 

Page 22
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

implementation continues to result in fraudulent tax refund issuance, e.g., lack of a 

process to use third-party information, multiple tax refunds continuing to be sent to 

same account/address. 

B. Obtained statistics on the identity theft filters for Processing Year 2012 and verified 

the accuracy of the statistics. 

C. Determined the number of deceased locks the IRS has placed on taxpayer accounts. 

D. Determined if we can identify the PIN method used to e-file the taxpayer’s tax return 

to assess whether the method used to obtain the PIN may be contributing to the ability 

to file fraudulent e-filed tax returns. 

1. Determined the requirements for requesting a Self-Select PIN via the IRS Internet 

site (IRS.gov) and by calling the IRS and identified any discrepancies in the type 

of information required to obtain a PIN. 

2. Evaluated the methods used to file with a Self-Select PIN in our population of 

identity theft returns in Step I.A. 

III. Assessed the status of the IRS’s proactive initiatives to identify and prevent fraudulent 

tax refunds resulting from identity theft. 

A. Determined the status of the IRS’s implementation of identity theft filters used to 

identify fraudulent tax returns at the time of tax return processing. 

B. Assessed the status of the IRS’s initiative to share information with local law 

enforcement. 

1. Interviewed IRS management to determine the specifics of the pilot program 

initiated in Florida to coordinate with law enforcement to assist in the 

investigation of identity theft. We obtained pertinent documents, including 

timelines for implementing the pilot and the IRS’s plans to expand the pilot or 

implement the program. 

2. Obtained key statistics relating to the pilot program, including the number of 

States participating and the number of related arrests resulting from the pilot. 

C. Reviewed the role of the Identity Theft Clearinghouse. We determined how the 

organization identifies characteristics of identity theft cases, uses those characteristics 

to help prevent identity theft, and coordinates with other functions of the IRS. 

D. Determined the status of IRS efforts to expand the locking of tax accounts, including 

those of deceased taxpayers and individuals without a tax filing requirement. 

Page 23
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Data validation methodology 

During this review, we relied on data extracted from the IRS’s Individual Returns Transaction 

File for Processing Year 2012, the Individual Master File for Tax Year 2011, the National 

Account Profile database, the Form W-2 File for Tax Year 2011, the Modernized Tax Return 

Database, and the Real-Time System database located on the TIGTA Data Center Warehouse. 

We also relied on data extracts from the IRS’s Individual Master File for Tax Year 2011 and an 

extract from the IRS’s Information Returns Master File database for Tax Year 2011 that were 

provided by the TIGTA Office of Investigations’ Strategic Data Services. Before relying on our 

data, we ensured that each file contained the specific data elements we requested. In addition, 

we selected random samples of each extract and verified that the data in the extracts were the 

same as the data captured in the IRS’s Integrated Data Retrieval System. As a result of our 

testing, we determined that the data used in our review were reliable. 

Internal controls methodology 

Internal controls relate to management’s plans, methods, and procedures used to meet their 

mission, goals, and objectives. Internal controls include the processes and procedures for 

planning, organizing, directing, and controlling program operations. They include the systems 

for measuring, reporting, and monitoring program performance. We determined the following 

internal controls were relevant to our audit objective: the internal controls prescribed by the 

IRS’s Internal Revenue Manual sections that are used by the IRS Accounts Management and 

Submission Processing functions to process identity theft tax returns. We evaluated those 

internal controls by interviewing management and reviewing policies and procedures. We also 

conducted tests of the IRS’s procedures to prevent identity theft tax returns from being 

processed. 

 

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Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Appendix II 

Major Contributors to This Report 

Augusta R. Cook, Acting Assistant Inspector General for Audit (Returns Processing and Account 

Services) 

Russell P. Martin, Acting Assistant Inspector General for Audit (Returns Processing and 

Account Services) 

Deann L. Baiza, Director 

Sharla J. Robinson, Audit Manager 

Jonathan W. Lloyd, Lead Auditor 

J. Edmund Carr, Audit Evaluator 

Karen C. Fulte, Senior Auditor 

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Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Appendix III 

Report Distribution List 

Acting Commissioner 

Office of the Commissioner – Attn: Chief of Staff C 

Office of the Deputy Commissioner for Services and Enforcement SE 

Chief, Criminal Investigation SE:CI 

Deputy Commissioner, Operations, Wage and Investment Division SE:W 

Deputy Commissioner, Support, Wage and Investment Division SE:W 

Deputy Director, Strategy and Finance, Wage and Investment Division SE:W:S 

Director, Customer Account Services, Wage and Investment Division SE:W:CAS 

Director, Refund Crimes SE:CI:RC 

Director, Return Integrity and Correspondence Services, Wage and Investment Division 

SE:W:RICS 

Director, Technology Operations and Investigative Services SE:CI:TOIS 

Program Manager, Integrity and Verification Operations, Wage and Investment Division 

SE:W:RICS 

Chief, Program Evaluation and Improvement, Wage and Investment Division SE:W:S:PEI 

Director, Submission Processing, Wage and Investment Division SE:W:CAS:SP 

Chief Counsel CC 

National Taxpayer Advocate TA 

Director, Office of Legislative Affairs CL:LA 

Director, Office of Program Evaluation and Risk Analysis RAS:O 

Office of Internal Control OS:CFO:CPIC:IC 

Audit Liaison: Chief, Program Evaluation and Improvement, Wage and Investment Division 

SE:W:S:PEI 

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Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Appendix IV 

Outcome Measures 

This appendix presents detailed information on the measurable impact that our recommended 

corrective actions will have on tax administration. These benefits will be incorporated into our 

Semiannual Report to Congress.

Type and Value of Outcome Measure: 

 Cost Savings, Funds Put to Better Use – Potential; $376,648,1031 ($1,883,240,515 over five 

years) in potentially fraudulent tax refunds issued from tax returns filed with an ITIN2

meeting the tax return characteristics of identity theft cases confirmed by the IRS 

(see page 9). 

Methodology Used to Measure the Reported Benefit: 

We obtained lists of identity theft cases confirmed by the IRS and reviewed these cases to 

identify common characteristics. We determined that most of the confirmed identity theft cases 

we reviewed did not have ******************2***********************************, to 

support the income claimed on the tax return. We applied the characteristics of these cases to all 

Tax Year 2011 tax returns filed and then filtered our analysis for those using an ITIN on the 

IRS’s Individual Return Transaction File3 that were processed in Processing Year 2012. These 

returns were filed with an ITIN instead of an SSN. We identified the most egregious cases of 

potential identity theft, which are those that have ****************2*********************

**********************************2************************************. 

Using the previously mentioned characteristics, we identified 141,062 tax returns filed using an 

ITIN that appear to be the result of identity theft. Further analysis showed that the IRS had 

issued $384,538,715 in tax refunds on these questionable tax returns. Based on the outcome 

measure reported in another TIGTA audit report (Ref. No. 2013-40-120, Sept. 2013), we reduced 

the number of tax returns and subsequent refunds issued for 2,812 tax returns that appear in our 

population of 141,062 tax returns and in the other audit’s population. Therefore, for this 

 

1

 The outcome measure was reduced from the $384,538,715 presented in the report to avoid taking an outcome 

measure on the same taxpayers as those reported in TIGTA, Ref. No. 2013-40-120, Stolen and Falsely Obtained 

Employer Identification Numbers Are Used to Report False Income and Withholding (Sept. 2013) (see Methodology 

Used to Measure the Reported Benefit). 

2

 See Appendix V for a glossary of terms. 

3

 Analysis performed on the Individual Returns Transaction File used data as of September 26, 2012. 

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Detection Has Improved; However, Identity Theft 

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Potentially Fraudulent Tax Refunds 

outcome measure, we are reporting 138,250 tax returns filed using an ITIN that appear to be the 

result of identity theft, which resulted in the issuance of $376,648,103 in refunds. 

Unless the IRS takes corrective action, we believe the IRS will continue to issue significant 

fraudulent tax refunds resulting from identity theft each year. As such, we estimate that the IRS 

will issue $1,883,240,515 in potentially fraudulent tax refunds as a result of identity theft over 

the next five years ($376,648,103 x 5 = $1,883,240,515). 

Type and Value of Outcome Measure: 

 Taxpayer Privacy and Security – Potential; 138,2504 tax accounts filed with an ITIN were 

compromised as a result of weaknesses in the IRS’s controls to detect and prevent identity 

theft (see page 9). 

Methodology Used to Measure the Reported Benefit: 

Our analysis of Tax Year 2011 tax returns processed during Processing Year 2012 described 

previously identified 141,062 potentially fraudulent tax returns that were improperly posted to an 

ITIN tax account. Individuals have an expectation that their accounts with the IRS will be 

secured and not used for fraudulent purposes. By processing the fraudulent tax refunds 

associated with these tax returns, the IRS did not secure the accounts of 141,062 taxpayers. 

Many of these individuals may now have to work with the IRS to provide information to prove 

that their identities were stolen and reestablish the accuracy of their tax accounts. 

Based upon the outcome measure reported in another TIGTA audit report,5

 we reduced the 

number of tax returns and subsequent refunds issued for 2,812 tax returns that appear in our 

population of 141,062 tax returns and in the other audit’s population. As such, this outcome 

measure includes the remainder of 138,250 tax returns. 

 

4

 The amount was reduced from the 141,062 presented in the report to avoid reporting an outcome measure on the 

same taxpayers as those reported in TIGTA, Ref. No. 2013-40-120, Stolen and Falsely Obtained Employer 

Identification Numbers Are Used to Report False Income and Withholding (Sept. 2013) (see Methodology Used to 

Measure the Reported Benefit). 

5

 TIGTA, Ref. No. 2013-40-120, Stolen and Falsely Obtained Employer Identification Numbers Are Used to Report 

False Income and Withholding (Sept. 2013). 

Page 28
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Appendix V 

Glossary of Terms 

Page 29

Term Definition 

Calendar Year The 12-consecutive-month period ending on December 31. 

Data Center Warehouse A collection of IRS databases containing various types of taxpayer account 

information that is maintained by TIGTA for the purpose of analyzing data for 

ongoing audits. 

Federal Trade 

Commission 

The primary Federal agency responsible for receiving identity theft complaints.

Filing Season The period from January through mid-April when most individual income tax 

returns are filed. 

Financial Management 

Service 

The Financial Management Service is a bureau of the U.S. Department of the 

Treasury providing central payment services to Federal Program Agencies, 

operating the Federal Government’s collections and deposit systems, providing 

Governmentwide accounting and reporting services, and managing the 

collection of delinquent debt owed to the Government. 

Form W-2 File The Form W-2 File from the Data Center Warehouse is an extract of 

Form W-2, Wage and Tax Statement, information filed by employers from the 

Information Returns Master File database. 

Individual Master File An IRS database that maintains transactions or records of individual tax 

accounts. 

Individual Returns 

Transaction File 

An IRS database containing transcribed tax returns for individuals that includes 

most forms and schedules. 

Individual Taxpayer 

Identification Number 

The IRS created the ITIN to provide a Taxpayer Identification Number to 

individuals who do not have and are not eligible to obtain an SSN. 

Information Returns 

Master File 

An IRS database that contains third-party information documents for 

taxpayers, such as Forms W-2 and Forms SSA-1099, Social Security Benefit 

Statement. 

Integrated Data 

Retrieval System 

IRS computer system capable of retrieving or updating stored information. It 

works in conjunction with a taxpayer’s account records. 
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Term Definition 

Internal Revenue 

Manual 

Provides procedural guidance for IRS operations. 

Internal Revenue 

Service Number 

An Internal Revenue Service Number is a temporarily assigned number used as 

an internal identifying number until a permanent Taxpayer Identification 

Number is supplied. 

Master File The IRS database that stores various types of taxpayer account information. 

This database includes individual, business, and employee plans and exempt 

organizations data. 

Modernized Tax Return 

Database 

The Modernized Tax Return Database is the legal repository for original 

e-filed returns received by the IRS through the Modernized e-File system. 

National Account 

Profile Database 

A compilation of selected entity data from various Master Files that also 

includes data from the Social Security Administration. 

Processing Year The calendar year in which the tax return or document is processed by the IRS.

Real-Time System The Real-Time System is the IRS system that houses ITIN application 

information. 

Tax Year A 12-month accounting period for keeping records on income and expenses 

used as the basis for calculating the annual taxes due. For most individual 

taxpayers, the tax year is synonymous with the calendar year. 

Taxpayer Identification 

Number 

A Taxpayer Identification Number is a nine-digit number assigned to taxpayers 

for identification purposes. Depending upon the nature of the taxpayer, it can 

be an Employer Identification Number, an SSN, or an ITIN. 

Page 30
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Appendix VI 

Management’s Response to the Draft Report 

Page 31
Page 32

Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Page 33
Detection Has Improved; However, Identity Theft 

Continues to Result in Billions of Dollars in 

Potentially Fraudulent Tax Refunds 

Page 34