Home > News > The Solution to Tax ID Theft Is an Unpopular One: Slower Refunds

Comments 0 Comments

The Government Accountability Office estimates that $5.8 billion was lost to identity thieves filing fraudulent tax returns in 2013 and that there may have been as much as $24.2 billion in thwarted attempts. Tax refund fraud losses are estimated to reach $21 billion by 2016, according to the Treasury Inspector General Tax Administration.

While the massive loss chronicled in the GAO report was big news (for a nanosecond anyway) the GAO’s recommendations for stemming the rising tide of tax-related fraud did not get a lot of attention. As we wend our way through a tax-filing season that will doubtless make headlines for record-breaking refund fraud, let’s take a moment to revisit those recommendations.

The only way to stop tax refund fraud is to change the way the tax filing and refund system works, and this may be a painful process for employers and taxpayers alike.

Why Is So Much Fraud Happening?

In 2012, the IRS received more than 148 million tax returns. The agency issued almost $310 billion in refunds to approximately 110.5 million taxpayers. It’s a lot to keep track of, and identity thieves are making serious bank on that fact. According to the GAO report, by March 1, 2012 — a month and a half before the filing deadline — the IRS had already paid out around half of that year’s tax refunds. And there’s the problem.

When the fiscal year ends and you begin the less than pleasant process of preparing your taxes, employers also get to work on filing your W-2 with the government. The feds then compare your tax return to the W-2 your employer files to make sure everything matches up. But here’s the catch: Employers don’t have to file W-2 wage data until March 2, if they file on paper, and March 31 for e-filers. So, half the refunds in 2012 were sent out on blind faith. (You read that right — blind faith.) As things stand now, the IRS only starts the process of matching employer-reported W-2 data to tax returns in July, long after most refunds have been issued. It’s called “look-back” compliance.

Does that sound crazy to you? Well, it is. Part of the reason for the slow compliance check is that W-2s have to go through the Social Security Administration before being sent over to the IRS. Why, you ask, is it done this way? Now in your heart you know the answer. It’s because that’s the way they do it!  But facts are stubborn things, and tax refund fraud is only going to get worse if the process doesn’t adapt to current circumstances.

That said, a simple change applied to the flow of information is not going to solve the problem. The IRS uses look-back compliance for an important reason — to get money back to taxpayers as soon as possible. Many taxpayers rely on refunds to make ends meet, and as a result the IRS is under enormous Congressional pressure to issue refunds promptly. In fact, the agency is required by law to pay interest if it takes longer than 45 days after the tax return’s due date (that is, typically April 15) to issue a refund. It is by dint of this system that most taxpayers can expect a refund within 21 days after filing their tax return.

The refund process as it stands now makes sense only as the quaint relic of simpler times. It’s the epitome of an analog approach getting trounced by our digital reality. Not to put too fine a point on it, I believe look-back compliance should go the way of the horse and buggy.

No Pain, No Gain

There is no simple solution that can make this happen overnight. The GAO’s suggestion of earlier W-2 filing deadlines might allow the IRS to match employer-reported wage information to taxpayers’ returns before issuing refunds. The recommendation in the report was to move up the employers’ deadline from March 31 to Jan. 31. This could be facilitated by requiring all employers to e-file W-2s, instead of the current arrangement, which states that only companies with more than 250 employees have to e-file. Paper filing costs more, takes longer and thus exacerbates the problem. The time for mandatory e-filing of W-2s was probably a decade ago, but better late than never.

The other solution, unfortunately, may involve changing the rules about refunds—or possibly even pushing tax day to later in the calendar. The GAO also brought up the possibility of delaying refunds, which is probably the most controversial recommendation from the viewpoint of taxpayers. After all, many Americans use their refunds to pay down debt, buy a new car or just help them pay their bills on time. A longer wait for a refund would clearly be unpopular, but throwing billions of dollars to identity thieves every year and doing little to stop it is untenable.

Refunds must be verified in order to keep tax refunds from landing in the wrong hands. The way to make this happen is by ending look-back compliance, or a drastic systems improvement.

I am not discounting the trouble the above suggestions could cause for people. Loans to bridge the time people spend waiting for refund checks wastes money that would be better spent on the necessities of life, but at the end of the day, we might have to make changes in the way wages are reported and refunds are issued to successfully contain the tax fraud epidemic, and that might require some less-than-wonderful adjustment time for all of us.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Income Tax:

Image: Hemera

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team