Watchdog pushes IRS on identity theft detection

A new fraud detection system that the Internal Revenue Service (IRS) is developing needs to be refined to spot identity theft, a watchdog said in a report publicly released Thursday. 

The Treasury Inspector General for Tax Administration (TIGTA) examined the system as part of its efforts to review the IRS's identity-theft detection efforts. Identity theft is a big issue for the IRS, with the agency having detected 1.8 million fraudulent tax returns with stolen identities in 2014, according to the report.

The IRS has been developing a new program, called the Return Review Program (RRP), to replace its current fraud detection system. The agency conducted a pilot of the program during the 2014 tax return processing year, and it expanded its use of the RRP the following year, the TIGTA said.

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While the RRP pilot successfully detected some returns involving identity theft that weren't flagged by other fraud detection systems, TIGTA found that the RRP did not detect more than 54,000 identity theft tax returns with refunds totaling more than $313 million that were identified by other existing systems. 

"As the IRS continues to develop the RRP, it needs to ensure that the RRP will identify identity theft cases being identified by existing systems as well as other identity theft cases," the TIGTA said.

The TIGTA recommended that the IRS ensure the RRP is detecting the identity-theft tax returns that are being identified by the existing systems before the RRP replaces them. The IRS agreed with the recommendation.

The watchdog also reviewed the IRS’s process for limiting the number of refunds that can be deposited into the same bank account. If there are more than three refund checks requested for an account, refunds are required to be converted to a paper check. 

The TIGTA found that programming and oversight errors led to more than 5,500 direct deposits not being converted to paper refund checks. The IRS has addressed two of the errors and said it will fix a third by August, according to the report.

The watchdog also said that the IRS needs additional processes for handling checks that are returned as undeliverable.