With thousands of taxpayers affected by fraudulent tax returns during this year's tax filing period, the Internal Revenue Service is getting ready to fight the scourge of identity theft. The IRS recently announced a collaborative effort with state tax authorities, tax preparation software producers, payroll and tax processing companies, and taxpayer organizations to develop more robust protection for taxpayers.

Among the planned steps are identifying new ways to validate taxpayer and tax return information at the time of filing, increasing information sharing between industry and governments, standardized sharing of suspected identity fraud information and analytics from the tax industry to identify fraud schemes and locate indicators of fraud patterns.

The impetus for this effort was a March summit meeting called by IRS Commissioner John Koskinen. Several weeks of working together has resulted in these initiatives, as outlined in an IRS bulletin:

Taxpayer authentication. The industry and government groups identified numerous new data elements 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. Some of these issues include, but are not limited to: 

• Reviewing the transmission of the tax return, including the improper and or repetitive use of Internet Protocol numbers, the Internet 'address' from which the return is originating.
• Reviewing computer device identification data tied to the return's origin.
• Reviewing the time it takes to complete a tax return, so computer mechanized fraud can be detected.
• Capturing metadata in the computer transaction that will allow review for identity theft related fraud.

Fraud identification. The groups agreed to expand sharing of fraud leads. For the first time, the entire tax industry and other parts of the tax industry will share aggregated analytical information about their filings with the IRS to help identify fraud. 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. The expanded effort will ensure a level playing field so everyone approaches fraud from the same perspective, making it more difficult for the perpetration of fraud schemes.

Information assessment. In addition to continuing cooperative efforts, the groups will look at establishing a formalized Refund Fraud Information Sharing and Assessment Center (ISAC) to more aggressively and efficiently share information between the public and private sector to help stop the proliferation of fraud schemes and reduce the risk to taxpayers. This would help in many ways, including providing better data to law enforcement to improve the investigations and prosecution of identity thieves.

Cybersecurity framework. Participants with the tax industry agreed to align with the IRS and states under the National Institute of Standards and Technology (NIST) cybersecurity framework to promote the protection of information technology (IT) infrastructure. The IRS and states currently operate under this standard, as do many in the tax industry.

Taxpayer awareness and communication. The IRS, industry and states agreed that more can be done to inform taxpayers and raise awareness about the protection of sensitive personal, tax and financial data to help prevent refund fraud and identity theft. These efforts have already started, and will increase through the year and expand in conjunction with the 2016 filing season.

For more information about identity theft and tax fraud, please contact Gray, Gray & Gray's Tax Department.