IRS: Public-private crackdown slashes identity theft, tax refund fraud

An IRS-tax industry crackdown is making progress in the battle against identity theft and tax refund fraud, officials said Tuesday as they announced plans for additional safeguards in 2018.

Fewer federal tax returns linked to identity theft entered the tax system in 2016, and the number of taxpayers who said they'd been victimized also dropped, along with the number of fraudulent refunds issued, the officials said.

Updating the results from the public-private effort launched in 2015, officials from the IRS, tax preparation firms, tax preparers and other industry leaders also unveiled plans for broader use of a 16-character security code on W-2 form tax forms and additional safeguards for the 2018 tax-filing season.

Among the highlights:

• The IRS stopped 883,000 tax returns with confirmed links to identity theft in 2016, a 37% drop from the year before. The nation's tax agency also stopped 443,000 potential tax refunds linked to identity theft, a 30% year-over-year decline.
• Financial institutions stopped 124,000 suspect tax refunds in 2016, half the number detected in 2015. The companies have stopped 127,000 suspicious refunds so far this year, reflecting a handful of cases involving several thousand accounts.
• The number of taxpayers who told the IRS they had fallen victim to identity theft dropped to roughly 376,000 in 2016, a 46% decline from the year before.

"We've seen the number of identity theft-related tax returns fall by about two-thirds since 2015," IRS Commissioner John Koskinen said in a statement announcing the update. "This dramatic decline helped prevent hundreds of thousands of taxpayers from facing the challenges of dealing with identity theft issues."

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The declines stem in part from the first-of-its-kind partnership between the IRS, state tax agencies, major tax-preparation companies and other tax industry participants. Spurred by continuing spikes in identity theft and tax refund fraud, the agencies have been sharing information and implementing new electronic safeguards and other measures aimed at thwarting identity thieves.

For instance, tax industry representatives have shared dozens of key data points from electronically-filed tax returns that have helped the IRS to identify tax scams and block fraudulent refunds.

As the crackdown continues in 2018, all official IRS W-2 forms used to file federal tax returns for the first time will include a verification code box. A 16-character code will appear on approximately 66 million W-2 forms, more than half of all forms issued, Koskinen estimated. Taxpayers who prepare their own tax returns and tax preparers will be urged to enter the code in the verification box if their form includes the 16-character entry.

Additionally, the IRS will ask tax professionals to gather more information about clients who file business tax returns.  The data could include the name and Social Security number of the business representative authorized to sign the tax return, as well as details of any estimated tax payments made before the return was filed.

Koskinen's IRS term expires in November, so he won't head the agency for the 2018 tax filing season. During a media conference call, he said Treasury Secretary Steven Mnuchin has been focused on "finding a successor."

"We know that cybercriminals are planning for the 2018 tax season, just as we are,"  Koskinen said. "This coming filing season, more than ever, we all need to work diligently and together to combat this common enemy."

Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc