Auditor: Identity theft could cost taxpayers $26 billion

Of the 2.2 million returns the IRS earmarked as fraudulent in 2011, roughly 940,000 involved identity theft, at a cost of $6.5 billion. The agency itself says that it prevented more than $14 billion in fraudulent refunds from being delivered that year.

The inspector general report and hearing came as lawmakers continue to grapple over how to best combat identity theft, with potential fraudsters able to access publicly available Social Security death records.

“Confronted with emboldened identity thieves and tax cheats, the American taxpayers expect the federal government to better protect identities,” said Rep. Charles Boustany Jr. (R-La.), the chairman of the Ways and Means Oversight committee. 

Steven Miller, the IRS’s deputy commissioner for services and enforcement, told the House panels that the inspector general's projections did not consider improvements the agency had made in rooting out fraud, and the IRS also said in an additional statement that it believed "the five-year estimate is far too high."

The agency has made identity theft a key focus in recent years, implementing and expanding screening filters and installing new methods for processing suspect returns. But Miller also said that he did not believe there was a panacea for tackling the problem of identity theft once and for all. 

“Absent some ability of the community to act in a fashion that doesn’t allow a Social Security number to be stolen, the service will always be working in small places to do things to stop this,” Miller said. “There is no one single thing that we can do to stop identity theft.” 

At the hearing, Miller also reiterated that IRS funding was stretched, which affected enforcement efforts. The agency is receiving roughly $11.8 billion this fiscal year, down from $12.1 billion in 2011. 

That argument once again resonated with Democrats, who have long maintained that the IRS more than makes up for budget increases with improved revenue collection. 

“Is there a more clear definition of being penny wise and pound foolish than to cut the IRS millions of dollars and cost the taxpayers at the end of the day billions of dollars?” said Rep. Xavier Becerra (Calif.), the ranking Democrat on the Ways and Means Social Security subcommittee. 

But in addition to the question of funding, Nina Olson, the nation’s taxpayer advocate, said that the IRS faced a natural tension in trying to both keep an eye out for fraud and quickly get refunds into the hands of taxpayers. 

Olson said the IRS could consider waiting to issue refunds until after the filing season is over, a practice used in other countries. 

There are also some current questions over whether the Social Security Administration can already limit the public availability of the so-called Death Master File, which the agency uses to keep track of the deceased. 

David Black, the Social Security Administration’s general counsel, asked lawmakers for a legislative remedy to that issue, and Miller said the IRS would like for a deceased person's Social Security number to be publicly unavailable for around two years. 

Rep. Sam Johnson (R-Texas), the chairman of the Ways and Means Social Security subcommittee, has introduced a bill that would end the publication of the Death Master File.