Tax industry and IRS team up to fight identity theft refund fraud (JOA)

By Sally P. Schreiber, J.D.

Tax software vendors will share analytical information about their customers’ tax filings with the IRS under new agreement announced by the IRS on Thursday. The IRS called the agreement “a sweeping new collaborative effort” to fight identity theft refund fraud in which it will partner with tax preparation and software firms, payroll and tax financial product processors, and state tax administrators (IR-2015-87).

The effort involves identifying new steps to validate taxpayer and tax return information at the time of filing, using increased information sharing between industry and governments. The tax industry has agreed to share suspected identity fraud information and analytics to identify fraud schemes and discover indicators of fraud patterns.

“This agreement represents a new era of cooperation and collaboration among the IRS, states, and the electronic tax industry that will help combat identity theft and protect taxpayers against tax refund fraud,” IRS Commissioner John Koskinen said in a press release. “Taxpayers filing their tax returns next filing season should have a safer and more secure experience.”

Three specialized working groups were established when the project kicked off in March. They are: Authentication; Information Sharing; and Strategic Threat Assessment and Response (2015 Security Summit). Each team has members from the IRS, states, and industry. Since then, the teams have focused on ways to validate the authenticity of taxpayers and the information they include on their tax returns, ways to improve information sharing to increase detection and prevention of refund fraud, and threat assessment and strategy development to prevent risks and threats.

The IRS also announced the following new initiatives:

Taxpayer authentication. The working groups identified new data that can be shared at the time of filing to help authenticate a taxpayer and detect identity theft refund fraud. The data will be submitted to the IRS and states with the tax return transmission for the 2016 filing season. These include:

  • Reviewing the tax return transmission, including improper and/or repetitive use of an Internet Protocol number, which is the internet “address” from which the return originates;
  • Reviewing computer device identification from the return’s origin;
  • Reviewing the time it takes to complete a tax return, so computer-mechanized fraud can be detected; and
  • Capturing metadata in the computer transaction to permit review for identity-theft-related fraud.

Identifying fraud. The groups agreed to expand sharing of fraud leads. Under the agreement, for the first time, the entire tax industry will share aggregated analytical information about their filings with the IRS. In the past, this post-return filing process has produced valuable fraud information because trends are easier to identify with aggregated data. Currently, the IRS obtains this analytical information from some groups.

Assessing information. In addition to continuing existing efforts, the groups will look to establish a formal Refund Fraud Information Sharing and Assessment Center to more efficiently share information between the public and private sectors to help stop fraud schemes. The IRS says this project would be helpful in many ways, including providing better information to assist law enforcement in investigating and prosecuting identity thieves.

Cybersecurity framework. Tax industry participants agreed to align their practices with the National Institute of Standards and Technology cybersecurity framework that the IRS and states currently operate under. (Many in the tax industry already operate under this standard.)

Increasing taxpayer awareness and communication. The IRS, industry, and the states agreed to increase their efforts to inform taxpayers about protecting sensitive personal, tax, and financial data to help prevent refund fraud and identity theft. These efforts, which have already started, will increase through the year and expand, in particular, for the 2016 filing season.

Continuous improvement

According to the announcement, the parties to the agreement recognize the need to continuously improve the tax system’s defenses for combating this threat to taxpayers and the tax system, including improving multilevel identity proofing and authentication capability that anticipates and stops threats.

The ability to answer knowledge-based authentication questions, known as “out-of wallet” questions, about taxpayers financial dealings such as car or mortgage payments was the reason the cybercriminals successfully breached the Get Transcript application system.