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IRS May Shift W-2 Deadlines to Combat Identity Theft and Tax Fraud

In light of recent news that the Internal Revenue Service paid $5.2 billion in identity theft tax refund fraud in 2013, the agency is being urged to take steps to prevent a reoccurrence. The Government Accountability Office (GAO) is encouraging the IRS to move its W-2 filing deadline to Jan. 31 and to lower the threshold for electronic filing of W-2 returns. The Treasury Department made a similar proposal regarding W-2 deadlines.

The evolving issue of identity theft tax refund fraud occurs when an identity thief files a fraudulent tax return using a legitimate taxpayer’s identifying information.

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Currently, employers have until March 2 to file W-2 information on paper. Employers who file W-2 information electronically have until March 31.

This, however, poses a risk to taxpayers, since W-2 wage data from employers are not available until months after tax refunds are sent. Therefore, the IRS cannot match the wage information to taxpayer returns before refunds are sent out. As a result, fraudulent claims are going undetected.

Identity theft tax refund fraud is difficult to detect because it takes advantage of the IRS’s “look-back” compliance model. In other words, rather than holding refunds until completing all compliance checks, the IRS issues refunds after conducting selected reviews.

The IRS currently begins matching employer-reported W-2 data to tax returns in July, following the tax season, according to the GAO report.

The GAO also recommends that Congress should consider providing the Treasury with the authority to lower the annual threshold for e-filing W-2s. Treasury has requested authority to reduce the 250-return threshold for requiring e-filing by employers. The Social Security Administration estimates that in order to meaningfully increase W-2 e-filing, employers filing as few as 5 to 10 W-2s would be required to e-file.

“If the IRS had access to W-2 data earlier — through accelerated W-2 deadlines and increased electronic filing of W-2s — it could conduct pre-refund matching and identify discrepancies to prevent the issuance of billions in fraudulent refunds,” the GAO report explains.

The IRS says that although $5.2 billion was paid in identity theft tax refund fraud, an additional $24.2 billion in fraudulent claims was avoided. However, the agency explains that the complex issue is difficult to accurately calculate.

The IRS has not yet agreed or disagreed with the GAO’s recommendations for combating identity theft tax refund fraud. It has, however, stated that it will determine how these potential corrective actions align with available resources and the agency’s priorities.

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