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Sen. Nelson Demands Crackdown On ID Thieves Stealing Tax Refunds

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Washington D.C. (CBSMiami) – U.S. Sen. Bill Nelson (D-FL) is calling for new and tougher federal laws to crackdown on identity thieves who use someone else’s name to steal their tax refunds.

Nelson’s latest push comes in the wake of two new reports released today by the U.S. Treasury Department’s inspector general on identity theft-related tax fraud.

The reports revealed that the government is still losing $3.6 billion a year in potentially fraudulent tax refunds and it’s taking over 300 days for consumers who’ve had their identities stolen to get their cases resolved. That’s down from the $5.2 billion in potentially fraudulent refunds that were issued in 2011.

“While these reports show that some progress is being made in reducing tax fraud, it’s also clear that there is still much to be done,” Nelson said in a letter to the Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee.

Nelson requested the two newly-released inspector general reports after law enforcement authorities in Florida contacted him about seeing an increase in the number of cases in Florida where people were having their identities stolen. In 2011, a crackdown by a Tampa task force uncovered as much as $130 million in fraudulent refunds and officials made 49 arrests.  

Nelson re-filed his legislation (S. 676) in April that would toughen criminal penalties for ID thieves who file fake refunds under someone else’s name.  It would also require the IRS to get legitimate taxpayers the refunds they’re due within 90 days.  Right now, according to these newly-released reports, it’s taking the IRS an average of 312 days to close identity theft cases. 

A similar version of Nelson’s bill stalled in the Senate last year.  The legislation he re-filed earlier this year is currently pending before the Senate’s Finance Committee. 

Identity Theft and Tax Fraud Prevention Act of 2013

Title 1:  Protecting Victims of Tax-related Identity Theft

Section 101.  Expedited refunds for identity theft victims.  In 2012, the average time necessary for the IRS to close identity theft cases was 196 days.  According to the Taxpayer Advocate, the amount of time needed to resolve a case can be cut in half if the IRS adopts appropriate administrative reforms.  The bill directs the Secretary to establish a plan of action for resolving and closing identity theft cases within 90 days.

Section 102.  Single point of contact for identity theft victims.  Victims of tax-related identity theft express frustration with the need to repeatedly contact the IRS regarding their case and having to explain their situation to a different IRS employee, who has no knowledge of the matter, each time they call.  The bill directs the Secretary to ensure that an identity theft victim has a single point of contact at the IRS that tracks the case from start to finish.

Section 103.  Enhancements to IRS PIN Program.  The IRS anticipates issuing over 600,000 personal identification numbers (PINs) to identity theft victims in 2013.  However, the PIN program still fails to protect all victims whose identities have been compromised because PINs are not issued until all tax account issues have been resolved.  The bill directs the IRS: (1) to expand the existing PIN program to provide victims with a PIN earlier in the review process, and (2) to issue a report to Congress on the effectiveness of PIN program.

Section 104.  Electronic filing opt out.  More than 80 percent tax-related identity theft occurs through electronically filed tax returns.  The IRS does not permit identity theft victims to “turn off” electronic filing. The bill would allow an individual filing an identity theft affidavit to direct the IRS not to process federal tax returns submitted electronically by persons purporting to be the taxpayer.

Title 2:  Shutting Down Abusive Identity Theft and Tax Fraud Schemes

Section 201.  Restrictions on ability to use prepaid cards for tax fraud.  A common identity theft scheme involves the purchase of a reloadable prepaid debit card using a stolen identity.  The criminal then files a tax return using the stolen identity and has the fraudulent refund transferred to the prepaid card through a direct deposit.  The bill directs financial regulators to issue new rules to make the account numbers associated with prepaid debit cards and other vulnerable accounts distinguishable from those in which the issuer verifies the identity of the account holder through more rigorous customer identification procedures.  The bill also directs GAO to review and evaluate customer identification procedures used by the prepaid card industry.

Section 202.  Limitation on multiple tax refunds to the same account.  An investigation by the Treasury Inspector General identified at least 10 bank accounts that had each received more than 300 fraudulent tax refunds.  The bill directs the Treasury Secretary to limit the number of refunds in a year that can be sent to an individual direct deposit account or mailing address.

Title 3:  Adding Critical New Protections to Safeguard Social Security Numbers

Section 301.  Restrictions on access to the Death Master File.  Identity thieves exploit public access to the Social Security Death Master File (DMF) to easily acquire the Social Security numbers of recently deceased persons, which they then use to file fraudulent tax returns.  The bill directs the Secretary of Commerce to restrict access to the DMF to certified persons that have a fraud prevention interest or other legitimate need for the information, and it establishes penalties for disclosure or misuse of the information.  

Section 302.  Prohibition on the display of Social Security account numbers on newly issued Medicare identification cards and communications provided to Medicare beneficiaries.  The publication of Social Security numbers (SSNs) on Medicare identification cards and other Medicare documents puts millions of individuals at risk of identity theft.  The bill requires the Medicare program to phase out the collection, use, and display of SSNs.

Section 303, 304, & 305.  Prohibition and penalties on the display, sale, or purchase of Social Security numbers.  Tax-related identity theft schemes rely on the widespread availability of stolen Social Security numbers (SSNs).  Identity thieves obtain SSNs from sources with access to files and databases that contain personal information on clients and customers, such as doctor’s offices, schools, and nursing homes.  Federal laws fail to adequately protect SSNs or penalize SSN traffickers.  The bill imposes new civil and criminal penalties selling, purchasing, or publicly displaying an individual’s SSN without informed consent. 

Title 4:  Strengthening Laws and Improving Enforcement against Tax-Related Identity Theft

Section 401.  Criminal penalty for tax fraud through identity theft.  Tax-related identity theft is generally prosecuted under a tax provision related to fraud and false statements (§ 7206).  Because tax-related identity theft can cause extreme hardships for victims, in addition to loss of government revenue, a tougher penalty is appropriate. The bill increases the maximum penalty for tax-related identity theft from 3 years imprisonment and a $100,000 fine to 5 years imprisonment and a $250,000 fine.  The bill clarifies that tax-related identity theft constitutes aggravated identity theft under federal criminal law, potentially adding 2 additional years to the sentence.

Section 402.  Increased tax preparer penalty for improper disclosure or use of return information.  Tax-related identity theft can occur when a paid tax return preparer sells, shares, or uses a client’s tax return information for improper purposes. The penalties for fraudulent disclosure or use of a taxpayer’s personal return information are too weak to deter potential criminals. The current law civil penalty is $250 per disclosure, capped at $10,000 per preparer in a calendar year. The current law criminal penalty is capped at $1,000 per conviction (and one year imprisonment). The bill increases the civil penalty to $1,000 per disclosure, capped at $50,000. It also increases the criminal penalty to a maximum of $100,000 per conviction.

Section 403.  Authority to transfer Internal Revenue Service appropriations for use for tax fraud enforcement.  The bill provides the IRS Commissioner with authority to transfer up to $10 million for tax fraud enforcement from amounts appropriated to other IRS accounts.

Section 404.  Local Law Enforcement Liaison.  State and local law enforcement agencies report difficulty obtaining the cooperation needed to aggressively pursue tax-related identity theft cases. The bill establishes a Local Law Enforcement Liaison (LLEL) within the Criminal Investigative Division of the IRS to administer information-sharing initiatives, respond to inquiries from State and local law enforcement, and ensure that privacy and confidentiality rules are preserved.      

Title 5:  Accelerating Transition to a Real-Time Tax System that Protects Taxpayers and Reduces Fraud

Section 501.  Improved detection of fraudulent tax returns through expanded use of the National Directory of New Hires.  Effectively combatting tax fraud through identity theft will require the IRS to identify false income information at the time a return is filed.  The National Directory of New Hires (NDNH) is a database maintained by the Department of Health and Human Services.  It includes timely employment data from W-4 forms, quarterly wage data from State and federal employment security agencies, and other valuable information.  Access to the NDNH would improve the ability of the IRS to identify fraudulent returns at the time the return is processed.  The bill includes a proposal from the President’s budget authorizing the IRS to use the NDNH to administer federal tax laws.

Section 502.  Plan of Action for a Real-Time Tax System.  Accelerating information matching and creating a real-time tax system is a critical component of the long-run battle against tax-related identity theft.  A real-time tax system would offer substantial benefits to taxpayers.  According to the Taxpayer Advocate, a real-time system will: (1) allow taxpayers to answer questions and address issues closer to the time of the transactions, (2) prevent taxpayers from facing IRS collection actions long after refunds have been spent, and (3) help taxpayer save money by avoiding the long-term accrual of penalties and interest.  The bill directs the Treasury Secretary to issue a report to Congress analyzing and outlining options and potential timelines for moving toward a tax system that reduces burdens on taxpayers and decreases tax fraud through real-time information matching.

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