Almost 25% of Tax refunds are claimed illegally in the USA

One persistent challenge the IRS continually deals with is preventing fraudulent refunds from being issued. Sadly, this phenomenon has become more and more common, as the number of refundable credits and their values continue to increase.

Such as the Earned Income Tax Credit (EITC), the Additional Child Tax Credit (ACTC), and the Recovery Rebate Credit (RRC). One out of four refunds are claimed illegally in the USA.

One way the IRS has addressed this issue is to screen tax returns to determine if income and wages are correct and if the legitimate taxpayer truly filed the tax return.

This blog addresses issues where the IRS, through its screening process, flags the tax return as potential identity theft (IDT); processing of the tax return is suspended; and a letter is sent to the filer asking them to authenticate their identity and certain tax return items before processing can resume.

f you use tax preparation software like TurboTax, TaxAct, or TaxSlayer, use multi-factor authentication. Multi-factor authentication offers extra security by requiring two or more credentials to log in to your account.

The additional credentials you need to log in to your account fall into two categories: something you have — like a pass-code you get via text message or an authentication app, or something you are — like a scan of your fingerprint, your retina, or your face.

Multi-factor authentication makes it harder for scammers to log in to your accounts if they do get your username and password.

In 2022, the IRS suspended processing of 4.8 million tax returns and requested taxpayers authenticate their identity prior to the IRS releasing their refunds.

Out of those, about two million taxpayers responded, verified their identities, and received their refunds; nearly 255,000 were confirmed as IDT; and over 2.5 million remain suspended as of December 31, 2022, because the taxpayers’ identities have still not been authenticated.

There are a couple of explanations as to why a taxpayer may not respond to the letter and authenticate their identity, the most obvious being the tax return truly was filed by an identity thief, and the thief has abandoned their attempt to obtain a fraudulent refund.

However, there are other possible explanations as to why the taxpayer’s identity has not been authenticated.

The taxpayer may have never received the letter, may have moved, didn’t understand the letter, or couldn’t get through on the IRS’s phone line to authenticate their identity, as the level of service on the TPP phone line was only about 31% for FY 2023 as of August 5, 2023.

In fact, in a recent conversation with Low Income Taxpayer Clinic (LITC) personnel on the authentication process, it was conveyed that many taxpayers – particularly taxpayers who speak English as a second language – find both the letters and the authentication process complex and confusing.

The IRS’s online tools, such as Where’s My Refund, provide taxpayers with limited information about the status of their refunds; however, this tool only tells taxpayers their tax return has been received or processed, or a refund was issued.

No information is provided to taxpayers when processing of a tax return has been suspended for potential IDT. Although the IRS has agreed to make enhancements to its Where’s My Refund? tool and provide taxpayers more information about the status of their tax return, this upgrade has not been done to date.

The IRS has committed to devoting some of the Inflation Reduction Act of 2022 funds to roll out several enhancements by next filing season to enhance the usefulness of the tool to taxpayers.

If you are required to authenticate your identity and lost your letter or didn’t receive one and as a result are still waiting for your 2021 or 2022 tax refund, contact the IRS to have the letter reissued.

IRS Government / ABC Flash Point News 2024.