Identity Theft - Will The IRS Delay Tax Refunds to Verify Identity?

The Internal Revenue Service should consider delaying the delivery tax refunds until taxpayers' identities are verified to combat identity theft, an advisory committee has recommended. In its 2012 annual report, the IRS Advisory Council said that for filers getting refunds in January, the IRS should consider issuing 25 percent of the refund and then send the rest only after ID verification.

The council singled out the use of identity theft to obtain refunds as a special issue. It applauded the IRS for its efforts, but said it must take more action to halt the growing problem. It noted that from the 2008 through 2012 filing season, the agency had discovered 600,000 taxpayers that had been affected by identity theft. Through mid-April 2012, the IRS stopped 325,000 questionable returns that sought $1.7 billion in refunds by utilizing filters designed to uncover such problems.

Steps taken during the 2012 filing season included the use of filters, tools to identify taxpayers with new circumstances such as a new job or bank account and enhanced use of the functionality of the Identity Protection Personal Identification Numbers for those whose identities had been stolen.

Besides recommending the delay of refunds, the council suggested that the IRS consider requiring fingerprints or other unique identifiers that could be associated with Social Security numbers used on tax returns. Fingerprinting could be performed by local police or other approved group, it said.

The council also noted the expansion of the number of individuals who are being required to have Registered Tax Preparer Identification Numbers. It said that about 500,000 individuals who are not CPAs, tax attorneys or Enrolled Agents might be unaware of their obligations under Treasury Circular 230 and the Internal Revenue Code.

These persons should be required to sign an acknowledgment that they are subject to Circular 230, the report continued. It noted that such an acknowledgment is already required with Form 2848, Power of Attorney and Declaration of Representative, which contains a declaration by the representative indicating awareness of regulations contained in Treasury Circular 230 concerning practice before the IRS.

However, the council's report said the acknowledgment for tax preparers should list activities that involve tax return preparation and advice as constituting practice before the IRS.

What do you think of the Advisory Council's suggestions? Thoughts on how the IRS can combat identity theft? Let us know in the comments section.

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