The IRS's failure to combat identity theft and tax fraud was ranked by the Government Accountability Office as one of the top weaknesses in the federal government, saying in its recent High Risk List that the tax agency paid out $5.8 billion in fraudulent refunds during the 2013 filing season.
Tax fraud is expected to increase even higher to $21 billion by 2016.
The GAO laid much of the blame on budget and staffing cuts. This, coupled with an increase in electronic filings and an outdated fraud detection system, make it much easier for fraudsters to file fraudulent returns, reported The Fiscal Times.
In 2013, the IRS said that 1.6 million taxpayers were affected by identity theft, compared to only 271,000 in 2010, reported the Treasury Inspector General for Tax Administration.
The IRS was, however, able to detect some $24 billion in fraudulent returns for the 2013 season.
"First the IRS needs to accelerate the distribution of W2 forms," James White, director of Tax Issues at the GAO, told the Daily Caller. "As of now, the employer has until the end of January to send the forms to their employees, the forms arrive at the IRS by the end of March and their IT systems start the 'matching' - between the employer's and the employee's W2 - in the summer. If a fraud is elaborate enough, then many fraudulent tax returns can be cashed in before summer."
White said the IRS should then consider upgrading its systems with real-time matching forms once the agency determines if it could prevent enough fraud for the upgrade to be cost-effective.
Electronically filing W2s would help improve the speed, according to White, who added, "Most forms are still filled with a pen and paper, meaning that IRS agents must put them in electronically first before they can be analyzed."
Financial institutions should also be involved the fraud prevention process, White said.
"Banks, where most tax returns end up, also have fraud detection systems; they can sometime catch up fraud that slipped through IRS systems," he said. "Although taxpayer privacy keeps the IRS from directly pointing out at specific fraudsters, the government agency could still send aggregated feedback to banks - stating the percentage of fraud suspicions ended up being accurate. This would show banks how accurate their own systems are."
IRS Commissioner John Koskinen said earlier this year that the agency's budget is so tight that it may have to shut down for a few days and furlough employees, reported NPR. Budget cuts will also mean fewer audits, delayed refunds and less employees available to help with customer service duties.
