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Will a new law for IRS tax fraud protection reduce identity theft?

On April 9, Senator Bill Nelson (D-FL) sponsored the Identity Theft and Tax Fraud Prevention Act of 2013, which aims to mitigate tax fraud in seven ways.

  1. Improve the process for tax fraud victims to receive their rightful tax refund in less time
  2. Place more restrictions on tax refund payment options, which are being abused by identity thieves
  3. Increase punishments for misuse of Social Security numbers and for improper use of information by tax return preparers
  4. Create a penalty specifically for identity theft in connection with tax fraud
  5. Strengthen law enforcement with a local identity theft liaison
  6. Place more restrictions on access to Social Security account numbers
  7. Transition to a real-time tax system

If we were in a mental gymnasium, I would applaud the bill for being a comprehensive response to the current trend in tax fraud. It seeks to choke off ID thieves at every turn – from stealing Social Security numbers, to restricting payment methods, which are frequently used by tax fraudsters. But barring the increasing severity of punishments, many of these points come into question under closer scrutiny.

For instance, placing more restrictions on tax refund payment options might be a great idea. Many of the current attempts at tax fraud utilize pre-paid debit cards as a kind of getaway vehicle. Once identity thieves have stolen Social Security numbers, their greatest difficulty lay in collecting the money and spending it without attracting attention. If scammers request the IRS disburse more than a given number of tax refund checks to one bank account, the IRS is alerted to the potential scam.

Prepaid debit cards are not electronically tracked, but a single mailing address, which receives a bunch of tax refunds still attracts attention.

A number of recently-caught tax fraudsters have tried to overcome this hitch by creating a network of addresses, which are controlled by a small group of fraudsters. The ID thieves will then collect the debit cards from the mail and be able to spend the money however they see fit.

Eliminating the pre-paid debit card option would force identity thieves to consider alternate escape routes, but it would also harm many tax-paying Americans who do not own a bank account and would need to cash the IRS check at Western Union, or a similar check-cashier. The transaction would incur an additional tax on those people who need the funds.

The bill also might overstep its bounds with the IRS, as a couple of the proposed changes would force the IRS to specific actions it might be unable or unwilling to take. The IRS is already allotting a considerable amount of resources improve the identity theft protections for taxpayers.

What reason is there to believe a politician would know a better way to improve the process than the agency, itself? And why would we need a law to micromanage the organization’s policy?

Although the Identity Theft and Tax Fraud Prevention Act of 2013 has only a small chance of passing the Committee, it does shed light on how the government functions and might overstep its bounds – even for a good cause.


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