Growing issue of tax return fraud: What are the causes and what can be done

Abstract

The aim of this thesis is to detail the current tax return fraud problem and provide proposed solutions.

The paper begins by describing the tax filing process. This process includes ways in which the taxpayer can file a tax return, current security measures of this process, and the percentages of individuals who file their return in the different ways. I then describe how a taxpayer receives a refund, the options the taxpayer has for methods of receiving a refund, and the percentage of people who receive a refund through direct deposit. This discussion also includes when forms are due and what the government agencies do when they receive the forms.

Next, I detail the problems associated with fraudulent federal tax returns. This relates primarily to the problem of identity theft and how it pertains to tax return fraud. I list several ways identity theft is a factor in this issue, including stolen identity information and the previously hacked IRS "Get Transcript" site. I also list and describe several ways taxpayers can deal with their identity being stolen after the fact.

I then propose five solutions to the proposed problem. The first is the authentication of information required by the IRS to file a tax return. The current authentication standards have proven to be weak, so I suggest less accessible security questions and alternate forms of identification such as a driver's license or state issued ID number.

Another proposed solution is increased controls at the IRS. This includes a more advanced computer system that can readily red-flag suspicious items. Additionally, I propose that the IRS should have access to the W-2 and 1099 forms at the same date they are sent to the individuals. Upon receipt of the W-2 and 1099 forms, the IRS should implement an automated system where the forms are scanned in and compared to the individuals' tax returns before a refund is remitted.

I then discuss the PINs currently implemented by the IRS available to the taxpayers, current issues with those PINs, and potential ways to resolve the issues relating to them. Problems discussed include accessibility and solutions include increased security and other ways to access these PINs.

Finally, I discuss what precautionary measures individuals can take and ways new companies are emerging to offer remedies. Individuals can aid in the solution to this problem by filing their tax return as soon as possible, being aware of any fraudulent activity, and notifying government agencies as soon as they are alerted of any fraudulent activity. Identity theft protection service companies are now developing to help individuals to be aware of fraudulent activity and to help remedy the problem after the crime has occurred.

The paper is concluded with a discussion of the monetary aspect of the tax return fraud problem, and how it compares to overall tax deficits. I also summarize the proposed problems and solutions, and suggest that a combination of evolving solutions be implemented to address the issue.