IRS adding more filters trying to catch business tax fraud


The IRS is continuing to hone its filters to catch business identity theft and tax fraud, using 84 selection filters last year to identify business tax returns claiming refunds for potential fraud but not always succeeding, according to a new report. 

The report, released Monday by the Treasury Inspector General for Tax Administration, found the filters identified and selected 60,296 business returns for further review as potentially fraudulent. It comes as the IRS has been stepping up its efforts to encourage tax professionals to be on the lookout for signs of data theft by identity thieves (see story).

The federal government has also come under pressure from lawmakers in Congress to do more to catch suspected fraudsters who profited from the COVID-19 pandemic by taking advantage of relief programs like the Paycheck Protection Programs, expanded unemployment insurance and refundable tax credits.

“In addition to the continued expansion of its business identity theft detection filters, the IRS continues to take actions to address deficiencies reported in prior reviews,” said the report. “These actions include developing procedures to promptly review business tax returns with high-dollar refunds and implementing a selection filter that identifies discrepancies with the reporting of estimated tax payments.”

The IRS headquarters building in Washington, D.C.

Andrew Harrer/Bloomberg

However, the IRS is nevertheless failing to catch many of the criminals, according to the partially redacted version of the report released by TIGTA. It pointed out that the IRS published its first Business Taxonomy Report last December and reported protecting almost $3.8 billion in fraudulent tax refunds from being issued since tax year 2016. However, the IRS also admitted in the report that identity thieves successfully received fraudulent refunds ranging between about $6 million and $3.2 billion. TIGTA’s review identified 3,243 returns filed as of December 31, 2020, with refunds totaling approximately $17.2 million with characteristics of confirmed fraudulent tax returns that weren’t caught by the IRS’s filters.

TIGTA made four recommendations in its report suggesting the IRS improve the identification of business identity theft, including evaluating the expansion of clustering in its filters; continuing research to make the Identity Protection Personal Identification Number program available to businesses; and developing a program to identify and verify something that has been redacted from the report, but is potentially fraudulent. The IRS agreed with three of the four recommendations, but it didn’t agree to develop a program to identify and verify the redacted information. However, TIGTA said it continues to believe that a pre-refund process is needed to prevent the issuance of potentially fraudulent refunds.

“We are proud of the work we have done to expand identity theft protections to more business return filers,” wrote David Alito of the IRS’s Small Business/Self-Employed Division, in response to the report. “During processing year 2021, there were 84 pre-refund identity theft filters being used to detect suspected IDT return filings. This resulted in revenue protection of $7.3 trillion in calendar year 2020 and $2.3 trillion in calendar year 2021. These amounts included revenue protected from potentially fraudulent refund claims associated with returns filed by suspected identity thieves attempting to obtain refundable credits intended to help businesses struggling with the economic effects of the COVID-19 pandemic.”

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