[Senate Hearing 114-257]
[From the U.S. Government Publishing Office]
S. Hrg. 114-257
PROTECTING TAXPAYERS FROM SCHEMES AND SCAMS DURING THE 2015 TAX FILING
SEASON
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
MARCH 12, 2015
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
______
U.S. GOVERNMENT PUBLISHING OFFICE
20-033-PDF WASHINGTON : 2016
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
COMMITTEE ON FINANCE
ORRIN G. HATCH, Utah, Chairman
CHUCK GRASSLEY, Iowa RON WYDEN, Oregon
MIKE CRAPO, Idaho CHARLES E. SCHUMER, New York
PAT ROBERTS, Kansas DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming MARIA CANTWELL, Washington
JOHN CORNYN, Texas BILL NELSON, Florida
JOHN THUNE, South Dakota ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina THOMAS R. CARPER, Delaware
JOHNNY ISAKSON, Georgia BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania MICHAEL F. BENNET, Colorado
DANIEL COATS, Indiana ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina
Chris Campbell, Staff Director
Joshua Sheinkman, Democratic Staff Director
(ii)
C O N T E N T S
__________
OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
Committee on Finance........................................... 1
Wyden, Hon. Ron, a U.S. Senator from Oregon...................... 2
Coats, Hon. Daniel, a U.S. Senator from Indiana.................. 7
WITNESSES
Ciraolo, Caroline, Acting Assistant Attorney General, Tax
Division, Department of Justice, Washington, DC................ 4
Camus, Timothy P., Deputy Inspector General for Investigations,
Treasury Inspector General for Tax Administration, Department
of the Treasury, Washington, DC................................ 5
Alley, Hon. Mike, Commissioner, Indiana Department of Revenue,
Indianapolis, IN............................................... 7
Valentine, Hon. John L., Chairman, Utah State Tax Commission,
Salt Lake City, UT............................................. 10
Klem, Ellen M., Director of Consumer Outreach and Education,
Office of the Attorney General, Oregon Department of Justice,
Salem, OR...................................................... 11
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Alley, Hon. Mike:
Testimony.................................................... 7
Prepared statement........................................... 29
Camus, Timothy P.:
Testimony.................................................... 5
Prepared statement........................................... 36
Ciraolo, Caroline:
Testimony.................................................... 4
Prepared statement........................................... 42
Coats, Hon. Daniel:
Opening statement............................................ 7
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 44
Klem, Ellen M.:
Testimony.................................................... 11
Prepared statement........................................... 44
Valentine, Hon. John L.:
Testimony.................................................... 10
Prepared statement........................................... 46
Wyden, Hon. Ron:
Opening statement............................................ 2
Prepared statement........................................... 48
Communication
Operation HOPE................................................... 51
(iii)
PROTECTING TAXPAYERS FROM SCHEMES
AND SCAMS DURING THE 2015
TAX FILING SEASON
----------
THURSDAY, MARCH 12, 2015
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:02
a.m., in room SD-215, Dirksen Senate Office Building, Hon.
Orrin G. Hatch (chairman of the committee) presiding.
Present: Senators Grassley, Crapo, Thune, Isakson, Toomey,
Coats, Heller, Scott, Wyden, Cantwell, Menendez, Carper,
Cardin, Bennet, Casey, and Warner.
Also present: Republican Staff: Kimberly Brandt, Chief
Healthcare Investigative Counsel; Chris Armstrong, Deputy Chief
Oversight Counsel; and Justin Coon, Detailee. Democratic Staff:
Joshua Sheinkman, Staff Director; Tiffany Smith, Senior Tax
Counsel; David Berick, Chief Investigator; and Daniel Goshorn,
Investigator.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
UTAH, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order.
The committee meets today to hear about growing criminal
activity that is targeting taxpayers across the country. These
criminal acts are perpetrated by thieves hiding behind
telephone lines and computers, preying on honest taxpayers and
robbing the Treasury of tens of billions of dollars every year.
This must stop, and we are here today to hear from some of
the Federal and State officials on the front lines of the fight
to catch these crooks and protect taxpayers. But first, I want
to talk about one case in particular, and one very large
number, by the way.
This is a hearing that is long overdue, as far as I am
concerned. We will get into it. I have to apologize, as Senator
Wyden is not here yet, but he is coming.
In this town, and especially right here on this committee,
we often talk in terms of hundreds of millions, billions, or
even trillions of dollars. Some joke about a number being
referred to as ``budget dust,'' even if that number has 9 or 10
zeroes behind it.
But let me tell you about a number that is truly stunning:
$15,800. Now, that $15,800 was saved through hard work,
sacrifice, and honest living. That is $15,800 saved for the
down payment on a new house for a growing family. That $15,800
in savings was wiped away by criminals who used fear,
confusion, and intimidation as their weapons.
This is the story of the Degen family from Taylorsville,
UT. I would like to play a news clip from KTVX, a Utah ABC
affiliate, that tells their story. Can we do that?
[Playing of video.]
The Chairman. Well, that is just one family out of millions
that have been targeted and thousands that have been
victimized. This is just one scam. But make no mistake,
taxpayers across the country are also facing identity theft in
record numbers, account take-overs, and other criminal attacks.
Once again, we have to stop this. Taxpayers must be more
aware of the risks and better protected from attack, and these
criminals must be found and brought to justice. I look forward
to the testimony from our witnesses on today's panel and to
hearing more about how we can accomplish these goals.
Now, let me turn over the time to Senator Wyden for his
opening remarks.
[The prepared statement of Chairman Hatch appears in the
appendix.]
OPENING STATEMENT OF HON. RON WYDEN,
A U.S. SENATOR FROM OREGON
Senator Wyden. Thank you very much, Chairman Hatch. I very
much appreciate the opportunity to work on these issues in a
bipartisan way.
Colleagues, since the day that the IRS opened its doors,
scam artists have been hatching up slick new ways of stealing
taxpayer dollars from the Treasury. What is new is, the rip-off
artists are now stealing Americans' identities and personally
threatening them on an industrial scale, while directly robbing
them of their hard-earned money. The fraudsters are constantly
dreaming up new tactics, and then they milk them for all they
are worth before they start getting caught. Then it is lather,
rinse, and repeat, onto the next scam, always one step ahead of
the law.
Today the committee will closely examine several of the
fraudsters' latest strategies that are plaguing taxpayers. The
one that is hitting Oregonians hardest is the fake phone call
demanding money or personal information on behalf of the IRS.
In fact, these calls were the number-one consumer complaint
registered with the Oregon Department of Justice just last
year. Not everybody knows that the IRS simply does not cold-
call individuals, making demands or threats. So it is pretty
clear from my vantage point, there is a lot more work to be
done to defeat this scourge.
Given the sophistication of this criminal activity and the
fact that a lot of it comes from overseas, this sure looks to
me like an emerging type of organized crime. So the real
question is, what is it going to take to root it out and get
the bad actors on the sidelines--more prosecutions, stronger
deterrence, more cops on the beat? What is the best way of
getting the word out so that taxpayers are not tricked into
surrendering their life's savings to some intimidating voice on
the other end of the phone line?
But even if our people manage to avoid the phone calls, you
can bet that the crooks find other ways to profit. Tax
preparation software has become the scammers' new fast lane.
These sharks manage to acquire a taxpayer's personal data from
the black market or hack into commercial databases, and then
they file false returns electronically. The victims may not
find out until much later in the tax season, and by then it is
just too late. Already there have been thousands of reports
like this in 2015. As we will hear today, some software vendors
are not doing enough to help prevent fraud.
In my view, part of the challenge is getting the States'
Internet tax services and the IRS on the same wavelength. They
have to communicate and work together to make sure that the
criminals cannot just, in a nimble fashion, slide from one
jurisdiction to the next as they rip off more unsuspecting
Americans.
Now, some taxpayers may choose to avoid software, but not
even a paid tax preparer is guaranteed to be safe. In fact,
many of them do not meet any standards for competence. There
are far too many of these con artists out there willing and
able to prey on the people who come through their doors. In
some of the most offensive cases, they secretly falsify their
victims' returns to boost the refunds and then they pocket the
difference. Once the tax season ends, the crooks disappear from
the storefronts they occupied, and there is no trace of where
they have gone.
A few States, like mine, have rules in place to help shield
the taxpayer from this kind of rip-off; most States do not. So
Senator Cardin and I have introduced the Taxpayer Protection
and Preparer Proficiency Act at the beginning of this Congress
to give all Americans the security they deserve. Our colleague
Senator Nelson is also a leader on this issue of keeping
taxpayers safe from identity theft and fraud, and all of us
wish, as I indicated to Chairman Hatch, to work on this in a
bipartisan way.
The bottom line is, there is no end to the ingenuity of the
con artists, so my hope this morning is that we will get some
fresh ideas for catching up to this wave of fraud and stopping
it. Obviously, it cannot come soon enough. We have a
distinguished panel here today. I am especially pleased that
Ms. Ellen Klem, the Director of Consumer Outreach and Education
in the Oregon Attorney General's office, is here. My thanks to
Ms. Klem, and to all our witnesses.
Mr. Chairman, I look forward to working with you and our
colleagues on this in a bipartisan way.
The Chairman. Well, thank you, Senator Wyden.
[The prepared statement of Senator Wyden appears in the
appendix.]
The Chairman. Our first witness today is Acting Assistant
Attorney General Caroline Ciraolo of the Tax Division of the
U.S. Department of Justice. Ms. Ciraolo was appointed Principal
Deputy Assistant Attorney General and Deputy Assistant Attorney
General of Planning and Policy of the Tax Division in January
of this year. Prior to that, she was chair of the Tax and
Litigation Group at Rosenberg, Martin, Greenberg in Baltimore.
Ms. Ciraolo, we welcome you to the committee, and we look
forward to hearing your testimony.
STATEMENT OF CAROLINE CIRAOLO, ACTING ASSISTANT ATTORNEY
GENERAL, TAX DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, DC
Ms. Ciraolo. Thank you, Senator.
Chairman Hatch, Ranking Member Wyden, and members of the
committee, thank you for the opportunity to appear before you
to discuss the Department of Justice's efforts to combat
identity theft and tax refund fraud.
The Department greatly appreciates the commitment that this
committee has brought to this very important issue. Combating
the theft of personal information to file fraudulent tax refund
claims is a top priority for both the Tax Division and U.S.
Attorneys' offices across the country. Your efforts to bring
attention to this growing and insidious crime will help educate
taxpayers about the importance of detecting and reporting
identity theft and fraud. Today's hearing also sends a strong
message that the government is determined to identify and
prosecute the individuals behind these schemes and, in doing
so, will bring all its resources to bear.
The Department's Tax Division, which I had the honor and
privilege of leading as Acting Assistant Attorney General, has
one purpose: to enforce the Nation's tax laws fully, fairly,
and consistently through civil litigation and criminal
prosecutions. Our close working relationships with IRS Criminal
Investigation, TIGTA, the U.S. Postal Service, the FBI, the
U.S. Attorneys' offices, and other Federal, State, and local
law enforcement partners, continue to enhance the government's
ability to respond quickly, efficiently, and forcefully to
often-changing patterns of criminal conduct.
Stolen identity refund fraud, or SIRF, is an example of
this type of challenge. In SIRF crimes, offenders steal Social
Security numbers and other personal information. They file tax
returns early in the filing season, showing a false refund
claim, and then have the refunds electronically deposited to a
bank account, loaded on prepaid debit cards, or mailed to an
address where the wrongdoer can access a check.
SIRF crimes often involve multiple offenders at various
levels in a conspiracy, and frequently involve employees with
access to databases containing large volumes of personal
information. SIRF crimes often hit the most vulnerable members
of our society, like Melissa and Brendan Degen. These include,
but are certainly not limited to, the elderly, the
hospitalized, students, and members of our military deployed
overseas. While the IRS will make good on any refund due to the
taxpayer, there are inevitable burdens and delays while the
matter is addressed, and the victims often experience a
profound sense of violation. Moreover, we are all victimized by
a loss to the U.S. Treasury.
SIRF crimes require immediate action to prevent enormous
harm to the American public. To this end, the Tax Division
expedites its review procedures in SIRF cases, and has issued
directive 144, which delegates to U.S. Attorneys' offices,
among other things, the authority to initiate tax-related grand
jury investigations in SIRF matters and to charge those
involved in SIRF crimes by complaint without prior
authorization from the Tax Division. The collaborative efforts
of the Tax Division and its law enforcement partners have
strengthened the response to this crime. Through December 31,
2014, the Department prosecuted more than 1,400 individuals,
and courts are imposing substantial sentences.
To further leverage the information gained from each
investigation, in February 2014, the Assistant Attorney General
of the Tax Division created a SIRF Advisory Board, consisting
of experienced SIRF prosecutors. The board works to develop and
implement a national strategy to ensure consistent and
effective nationwide enforcement and prosecution of SIRF
crimes.
For example, the board conducts training sessions for fraud
analysts at the IRS Scheme Development Centers. The board
provides training and resources to prosecutors across the
country, and it works with U.S. Attorneys' offices to develop
local task forces.
These initiatives enable prosecutors and law enforcement
agencies to work together to identify schemes and to pursue the
most culpable offenders while providing the IRS with real-time
information that can be used to improve its filters and stop
the issuance of fraudulent refunds. The prosecution of SIRF
crimes is a national priority, and, together with our law
enforcement partners, we will continue to look for the most
effective ways to punish the offenders and bring this conduct
to an end.
Thank you again for this opportunity to provide the
Department's perspective on this issue, and I look forward to
answering any questions you may have.
The Chairman. Well, thank you so much.
[The prepared statement of Ms. Ciraolo appears in the
appendix.]
The Chairman. Our next witness is Timothy Camus, the Deputy
Inspector General for Investigations at the Treasury Inspector
General for Tax Administration, or TIGTA. Mr. Camus has served
at TIGTA and TIGTA's predecessor, the Internal Revenue
Service's Inspection Service, for over 23 years. He has a long
career of having successfully investigated cases of domestic
terrorism, bribery, and fraud affecting the IRS.
We certainly welcome you, Mr. Camus, and we look forward to
taking your testimony at this time.
STATEMENT OF TIMOTHY P. CAMUS, DEPUTY INSPECTOR GENERAL FOR
INVESTIGATIONS, TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION, DEPARTMENT OF THE TREASURY, WASHINGTON, DC
Mr. Camus. Thank you, Chairman Hatch, Ranking Member Wyden,
and members of the committee. Thank you for the opportunity to
testify on the topic of tax schemes and scams during the 2015
filing season.
By raising public awareness about criminals' efforts to
swindle honest Americans out of their money, we may prevent the
next person from becoming a victim, which is a very good thing.
Each year, the IRS compiles what it sees as the dirty dozen tax
scams on its website. Many of these schemes peak during the
filing season as people prepare their returns or utilize the
service of paid preparers. My statement today briefly outlines
the top schemes and scams currently affecting taxpayers, as
they have proven to be surprisingly effective ways to steal
money, in many cases before the victim even realizes they have
been scammed.
The first scam is the phone impersonation scam, which
landed on the top of the dirty dozen list this year. It is the
largest and most pervasive impersonation scam that we are aware
of, and it has claimed thousands of victims in every State
represented on this committee.
Here is how it works. The intended victim receives an
unsolicited phone call from a person claiming to be an IRS
agent. The caller, using a fake name, tells the victim a made-
up badge number and claims that they owe tax and that they are
criminally liable for some amount owed. The callers may even
know the last four digits of the victim's Social Security
number. They then threaten the victim by stating if they fail
to pay immediately, the victim will be arrested or face other
criminal sanctions, such as losing their driver's license.
I myself received one of these calls at my home on a
Saturday. TIGTA has received over 366,000 reports of these
calls, averaging between 9,000 and 12,000 calls coming in to my
agency each week. As of March 9, 2015, over 3,000 individuals
have been victimized by this scam, by paying a total of $15.5
million, or an average of $5,000 per victim.
The highest reported loss by one individual was a
staggering $500,000, and in one particularly sad story, a
member of this committee forwarded a letter to us from a
constituent whose close relative suffered a tragic death after
receiving harassing phone calls from these scammers.
To help educate taxpayers, we are reaching out via the
media in conjunction with the IRS and the Federal Trade
Commission, as well as providing testimony to this committee,
in hopes of eliminating this type of abuse and preventing other
vulnerable individuals from becoming victimized.
Another ongoing scam I would like to highlight involves
using the story that the victim has won a lottery. This is a
continuation of an old scam. It starts with an e-mail or a
telephone call out of the blue declaring that the victim has
won the lottery, but, in order to collect the winnings, they
must first pay the tax to the IRS. The lottery scam often, but
not always, originates from outside of the United States. In
the end, the victims pay the money, but they never receive any
lottery winnings.
Just as serious as these scams is the risk of taxpayer
refund identity theft. The IRS has made improvements in its
identification of identity theft returns before fraudulent tax
refunds are released, but continued attention is needed to
effectively combat this crime. For example, the IRS still does
not have timely access to third-party income and withholding
information. Most of this third-party information is not
received by the IRS until well after the taxpayers begin filing
their returns.
The deadline for most information returns with the IRS is
March 31st, yet taxpayers began filing their returns this year
on January 20th. This gap in time prevents the IRS from
conducting validity checks. Of course, legislation would be
needed to accelerate the filing of the information returns.
The IRS has taken steps to effectively prevent the filing
of identity theft tax returns by locking the tax accounts of
deceased individuals to prevent others from filing a return
using the departed's name or Social Security number.
For processing year 2014, the IRS rejected over 338,000 e-
filed returns and stopped nearly 16,000 paper-filed returns
through the use of these locks. Just 11 days after the filing
season this year began, the IRS reported that it had prevented
the issuance of more than $2 million in fraudulent refunds as a
result of these filters.
Other schemes such as prisoner fraud, unscrupulous tax
preparers, and phishing scams are discussed in depth in my
written testimony. Much work is being done on multiple fronts
to address these criminal activities. We hope this work will
reduce or eliminate their impact on taxpayers.
Chairman Hatch, Ranking Member Wyden, thank you for the
opportunity to share my views. I look forward to questions.
The Chairman. Thank you so much.
[The prepared statement of Mr. Camus appears in the
appendix.]
The Chairman. I am going to turn, briefly, to Senator Coats
to introduce our next witness.
OPENING STATEMENT OF HON. DANIEL COATS,
A U.S. SENATOR FROM INDIANA
Senator Coats. Mr. Chairman, thank you very much. I thank
you for inviting our Indiana Department of Revenue Commissioner
Mike Alley to testify today.
Thanks to the leadership of our Governor Mike Pence and
Commissioner Alley, our Department of Revenue developed a plan
that stopped $88 million in attempted identity theft in the
last filing season. This involved 78,000 fraudulent returns and
12 percent of all the refund dollars that were requested.
The effort to do that, as Mr. Alley will explain, cost the
State $8 million. The return on investment was $88 million.
Compared with some of the things we do around here, which are
usually the opposite--spend $88 and get $8--we spent $8 and got
$88 back and saved a lot of taxpayers from this fraud, and we
are currently bringing the needed savings to our State.
Mr. Alley, Commissioner Alley, brings a wealth of private-
sector experiences to his job. He has worked for decades in
leadership positions in the banking industry. He is a CPA. He
has started businesses, so he understands, first-hand, how
important the customer service role is for the Department of
Revenue.
Again, Mr. Chairman, I thank you for inviting Commissioner
Mike Alley to testify this morning and look forward to his
testimony.
The Chairman. Great.
STATEMENT OF HON. MIKE ALLEY, COMMISSIONER, INDIANA DEPARTMENT
OF REVENUE, INDIANAPOLIS, IN
Commissioner Alley. Thank you, Senator Coats.
Chairman Hatch, Ranking Member Wyden, and committee
members, thank you for inviting me to discuss this important
topic with you today. On behalf of Governor Pence and the
citizens of Indiana, it truly is our honor to be here and share
our story.
I would like to share really three points with you today:
the first, the nature of the problem and the overall breadth,
which we have already heard here today is significant; the
steps that Indiana has taken and the lessons we have learned;
and then recommendations to more fully and effectively address
this epidemic problem.
Tax refund fraud is one of the most lucrative platforms for
criminals to monetize the value of stolen identity information,
and the advent of electronic filing and processing has only
enhanced the ability of criminals to utilize economies of scale
in filing large volumes of fraudulent returns at nominal cost.
As Senator Coats indicated, in 2014, 12 percent of the
total refund dollars that were requested from Indiana were
found to be fraudulent. Fortunately, we were able to stop them.
They represented 78,000 fraudulent returns that we stopped that
contained manufactured or stolen IDs, and again we saved the
State $88 million in the process.
It is still early in the 2015 filing season, but we are
already seeing a dramatic increase in the use of valid IDs
which have been stolen. With the increase of the reported
successful hacks all across the United States of U.S.
companies, we believe the availability of valid stolen IDs has
never been greater, and the fraudsters have clearly upped their
game, and we must do the same.
Second, let me share with you what we have done here in
Indiana. In 2012, we realized that we were suffering
substantial losses from refund fraud. Accordingly, we worked
with Governor Pence and his team to effectively identify a
program that we could begin building. We knew that we needed to
make significant systemic modifications, and we needed to do it
before the next filing season. Our staff reached out to fellow
States through the Federation of Tax Administrators and also
our partners at the IRS, to see if there were some ideas we
could borrow and implement rapidly. The response was very
supportive, though we noted partial solutions and fragmented
efforts across the group.
With strong support from Governor Pence, we initiated a
pilot program to screen all returns for suspicious identities.
This program used LexisNexis', a third-party
commercial vendor, to screen returns and note identity theft
information such as name, address, Social Security number, and
other identifier information.
We processed those returns. When they proved to be
suspicious, we withheld those, and sent a confirmation letter
to those taxpayers to have them confirm their identities.
Again, this had a dramatic impact on our ability to recognize
fraudulent identities and stop those refunds.
The identity confirmation quiz is only a part of a larger
process. It became very clear in the beginning that the
Department would need to make some systemic changes by making
significant investment in both staff and technology, and,
further, we needed to change our approach to how we deal with
fraud.
For the 2015 filing season, we have continued to make
enhancements. We have implemented some new pre-filter
processing platforms that include a decision matrix that will
allow us to better identify those valid IDs. We have also
defined greater expectations from our certified software
vendors as to the information they will provide to us and the
level of fraud that they send our way.
We are still battling this problem, but a few key lessons
have been learned. First, it must be a strategic priority.
Identity theft and refund fraud are here to stay, and we have
to address them. It requires a fiscal investment in leadership,
staff, technology, and third-party resources.
Second, collaboration. No one has all the answers, and we
cannot solve this problem by ourselves. Sharing data, best
practices, and experiences among all of the revenue agencies
across the States, as well as the Federal Government and
software vendors, is going to be important. Having access and
ability to communicate on a timely basis is critical. We have
to develop some targeted solutions. Fraudsters will continue to
change their approaches, and we have to stay ahead.
Finally, I would just note that the pre-paid debit card is
an issue that I think needs to be addressed. It is a preferred
tool of fraudsters in receiving their refunds. We found that
over 50 percent of those returns with pre-paid debit cards are
fraudulent.
In terms of some recommendations on things we can do, we
consider that the solution really encompasses a three-legged
stool concept which notes that the States, the IRS, and
software vendors each represent a significant and important leg
of the stool. Each has unique data, perspectives, and
capabilities that the system as a whole requires in order for
us to make better decisions.
The IRS is certainly in a great position to help us manage
highly sophisticated fraud. States must work more
collaboratively together. Finally, software vendors also have
great information and can be helpful in sharing their
intelligence.
In conclusion, I just want to summarize that, first, this
problem is here to stay, and we have to address it. Second,
collaboration and sharing of information among the IRS and the
States, reducing some of the barriers to our ability to share
anonymous aggregate information, is critical. Third, we have to
make the investments. As Senator Coats noted, we made an
investment that yielded over a ten-times return, and I am
confident providing that continued investment is the only way
that we can get out ahead of this and beat it.
On behalf of Governor Mike Pence and the citizens of
Indiana, thank you for allowing us to share our story. I look
forward to trying to answer any questions you may have, but
thank you for allowing us to be here.
The Chairman. Well, thank you. Thank you, Senator Coats and
Commissioner Alley. We appreciate you making an effort to be
here.
[The prepared statement of Commissioner Alley appears in
the appendix.]
The Chairman. Now I am very pleased to introduce our next
witness, Commission Chair John Valentine of the Utah State Tax
Commission. Chairman Valentine was a member of the Utah State
Senate, where he served with distinction from 1998 until his
confirmation as Tax Commission Chair in September 2014.
Prior to that, he was in the Utah House of Representatives,
and was also an attorney in private practice. Chairman
Valentine, we are really grateful that you have taken time out
of your schedule to be with us today. I want to thank you for
coming to Washington during the filing season and joining the
hearing this morning. So, we appreciate all of you being here.
STATEMENT OF HON. JOHN L. VALENTINE, CHAIRMAN,
UTAH STATE TAX COMMISSION, SALT LAKE CITY, UT
Mr. Valentine. Thank you very much, Chairman Hatch and
Ranking Member Wyden. Thank you also for giving us this time.
Esteemed members of the committee, I am here to discuss
ways to reduce the tax frauds that we are seeing envelop this
country. There are four issues that you really ought to
consider: (1) strengthening information sharing between the IRS
and the States; (2) stricter regulation of the financial
industry as it relates to pre-paid debit cards; (3) regulating
the practice of applying refunds to payment of fees for filing
services, a practice sometimes called in the industry ``refund
transfers''; and (4) requiring third-party filing services to
tighten front-end security by using multi-factor authentication
and other measures to secure data from unauthorized disclosure
and identity theft.
Prior to the commencement of the 2015 filing season, Utah
installed a state-of-the-art computer software system to
identify potentially fraudulent returns. On January 20th of
this year, the Utah Tax Commission opened filing of income tax
returns and deployed this system. As we began to process
returns, our system started sending out error notices that
indicated that there were fraudulent returns.
We then followed up with verification letters of the
suspicious returns to the taxpayers. Within 10 days after
opening the filing season, we began receiving calls from
taxpayers saying, ``We have not filed our returns yet.'' We
initially thought that these were isolated incidents, but, as
the week progressed, it was clear that they were not.
We found several factors that were common in all of these
calls: (1) the returns had the direct deposit information
changed from the previous year's bank account to a pre-paid
debit card; (2) the returns contained routing and account
numbers that differed between the Federal returns and the State
returns; and (3) most of the returns appeared to have the exact
2013 return data populated in the 2014 return.
The next issue we found was common was that the address on
the returns was the same as the address on the 2013 return,
even when there was an error in the address. Finally, since
most of the filings were made through one vendor, it appeared
that something in their process was compromised.
After communicating with that vendor and notifying other
States of what we were finding, we talked with the Internal
Revenue Service and said, ``We think there may be a compromise
of the MEF system,'' that is the Modernized Electronic Filing
system.
The accounts in question that we were able to identify were
immediately sent to the Ogden Service Center. Thirty-one
returns in that first week were confirmed suspicious. We asked
them in a phone conversation to confirm on their side. We are
still waiting to hear from them.
Many have asked what action was undertaken by the State of
Utah when it discovered this attack. In short, we hurried. We
stopped all refunds until we could get our arms around it.
During that first week, we found five different fraud schemes,
four of which were ones we had seen before--they are
institutions, they are preparers. But one was a new one, and
the new one involved someone who had actual tax returns--not
just identity theft, but tax returns from the prior year.
Now, as we continued to prevent the outflow of fraudulent
refunds, we found great difficulty in determining the nature of
the financial institution and the account information.
Specifically, we found that there was no uniformity in
numbering to determine traditional debit cards from traditional
bank accounts. In other words, we could not tell whether we
were refunding to a pre-paid debit card or whether we were
refunding to a legitimate bank account. There is an easy fix on
this one. The easy fix is to require the financial industries
to have identifier numbers in the routing number or in the
account number to identify the account as a pre-paid debit
card. We do that already with checking accounts and savings
accounts; we do not do it with pre-paid debit cards.
While we progressed through the investigation, we found a
practice that enables fraudsters to perpetrate fraud without
having anything at all at risk: the refund transfer. Here is
how it works. The fraudster is allowed to deduct the third-
party filing fees from the refund, the third-party filing fee
gets paid, the fraudster receives the cash, and the State of
Utah is out the money.
Finally, we found third-party filing services often lack
front-end identity security measures. Quality firewalls need to
be installed by third-party vendors, both for the IRS and for
the State Tax Commissions.
Thank you, Mr. Chairman. Thank you, Ranking Member Wyden.
The Chairman. Well, thank you. We appreciate your
testimony.
[The prepared statement of Mr. Valentine appears in the
appendix.]
The Chairman. Finally, we welcome Ellen Klem from the
Office of the Oregon Attorney General. Ms. Klem serves as the
Director of Consumer Education and Outreach at the Attorney
General's Office and works to protect Oregonians from financial
scams, including the types of scams and schemes we are talking
about today. So we are happy to welcome you here as we have the
others, and we look forward to taking your testimony.
STATEMENT OF ELLEN M. KLEM, DIRECTOR OF CONSUMER OUTREACH AND
EDUCATION, OFFICE OF THE ATTORNEY GENERAL, OREGON DEPARTMENT OF
JUSTICE, SALEM, OR
Ms. Klem. Thank you, Chairman Hatch and Ranking Member
Wyden. It is an honor to be here today and share my expertise
and experience with you.
Every day I hear stories from Oregonians about a wide
variety of frauds and scams. Lately, these stories have focused
almost exclusively on the IRS imposter scam. That is because,
as Senator Wyden mentioned earlier, in 2014 this scam topped
Oregon's list of consumer complaints. Last year, we received
more than 1,300, nearly twice the number as the next highest
category. What is worse, these victims reported losses to us
totaling more than $75,000, and we know from testimony
presented here today that that number is just the tip of the
iceberg. That is why I am here today to tell you the story of
two of those victims and to talk a little bit about what the
Oregon Attorney General is doing to prevent this from happening
to others.
The first story is that of a woman I will refer to as
Diane. In August of 2014, she lost $15,000 to an IRS imposter
scam. This is the largest individual loss reported to the
Oregon Department of Justice in 2014. Like many other victims,
she received a message on her answering machine from a man
claiming to be from the IRS, directing her to call him back at
a phone number with a 202 area code. She returned the call, and
the person who answered read her an affidavit for her arrest,
threatened her with a fine of $25,000, 18 months in prison, and
told her she would be arrested later that day if she did not
pay. Diane was terrified. She pleaded, she begged. The scammer
said he could settle the matter, but only if she paid $15,000
by purchasing a series of pre-paid money cards. Diane made the
only choice she thought she had. She complied with the request,
and she was out $15,000.
Individuals like Diane who send money to the scammers are
not the only victims of imposter scams. In September of 2014, I
was contacted by Marissa Phillips, a small business owner whose
employee, Linda, had fallen victim to an imposter scam. After
sending a very small amount of money to the scammers, Linda
quickly realized she had been had and stopped answering her
phone. But the scammers kept calling. When it was clear they
were not going to get a hold of Linda at that phone number,
they began calling Marissa's small business, a business that
provides in-home care services for seniors and persons with
disabilities. When Marissa called me a few days later, she told
me the scammers had called her business at a rate of 100 phone
calls per minute for 20 minutes straight, and all of these
calls prevented her from providing help to those who actually
needed it, the seniors, their families, hospitals, doctors, and
other staff. Ultimately, Marissa was forced to change her
business's phone number and all of its accompanying marketing
materials.
Thankfully, not everyone in Oregon who receives a phone
call from an IRS imposter falls victim to the scam, and I would
like to think that is because we have been working very hard to
educate all Oregonians, especially our most vulnerable. The
Oregon Attorney General has several educational tools aimed at
scam prevention, because she and I both know that well-informed
Oregonians are much more likely to recognize fraud and less
likely to become victims if they are educated.
We also know that these scams can be very hard to track and
prosecute. The Oregon Attorney General also has invested in
strong partnerships with Federal, State, and local governmental
entities and officials, tribes, community organizations,
advocacy groups, and members of the media. Through these
partnerships, we are able to share complaints, coordinate
investigations, and disseminate information to the public. Our
partners give us a stronger voice to share information and keep
Oregonians like Diane, Linda, and Marissa safe.
This concludes my testimony. Again, thank you, Chairman
Hatch, and thank you, Senator Wyden, for the opportunity to
share these stories with you today.
The Chairman. Well, we want to thank you and all the
witnesses here today. My gosh, I think a lot of people are
going to be very surprised at how this is ballooning in our
country.
[The prepared statement of Ms. Klem appears in the
appendix.]
The Chairman. Let me turn to you, Commissioner Valentine. I
want to thank you again for coming all the way back here to
testify in the midst of filing season. I really applaud the
innovative approaches that you are taking, that you and other
State commissioners like Commissioner Alley are taking as well,
to protect our taxpayers and to stop criminals.
Now, in your testimony, you mentioned that you would like
to strengthen information sharing between the IRS and the
States. I would really appreciate it if you would elaborate a
little bit more on that idea, just to explain what kind of
information would be useful to you and what information you
could provide to the IRS that would perhaps be useful to them.
If you have any suggestions about how the Finance Committee
could help facilitate the sharing of information, I would also
like to have you comment on that, if you would care to.
Mr. Valentine. Thank you, Mr. Chairman. There are actually
a couple of places that are kind of rub points. Let me say this
as the background though: we have a great working relationship
with the IRS, especially the agents we deal with. The
Memorandum of Understanding that we have with the Service
allows us to share information. The trouble is, it is not being
shared in real time. The information is very, very much
delayed. Sometimes we are not getting the information that we
could use in a timely fashion to be able to look at the returns
as they are coming in.
One of the things that the Senate Finance Committee may
consider is the idea of moving up the filing deadline for the
W-2s for employers. As I think Senator Wyden indicated, we have
a problem. Right now, the W-2s go out to the individuals on the
31st, but we have a big gap, because the employers do not have
to have them out until March 31st. So we have a 2-month gap.
States are under a lot of pressure, as is the Federal
Government, to make the refunds. This is the people's money;
they have overpaid it. Yet, we cannot give them the refund
without knowing for certain that the right person is getting
the refund. That gap is a big problem for us, and that one
would help a lot.
Another one is for the Senate and the House to be able to
really encourage the IRS to have a more formalized sharing of
information. I gave you the one example of the 31 returns we
submitted 6 weeks ago. They should be able to respond pretty
quickly on something like that. We had identified them as
fraudulent returns, we confirmed with the taxpayers that the
returns had not even been filed, and yet we still cannot hear
back in real time. Those are the kinds of things that I think
could really help.
The Chairman. Well, thank you very much.
Mr. Camus, let me ask you this. I want to thank you and the
Inspector General as well for all of your efforts to catch
these criminals and educate the public about these types of
scams.
In my opening statement, I showed the video about the Degen
family. The same criminals who targeted them are likely out
there at this very minute targeting other Americans. Can you
pledge to me that your office is doing everything in its power
to track them down and stop them? Can I have that commitment?
Mr. Camus. Sir, you more than have that commitment. The men
and women who work at the Treasury Inspector General for Tax
Administration are working day and night on this crime, and we
are partnering with other law enforcement agencies as well. It
hurts us when these victims are victimized as described here.
We instruct our agents that when they run into a victim or
they hear from a victim who has actually lost money, we need to
spend time with those victims, hear their stories, and attempt
to get as much information as we can. We have a very
aggressive, ongoing investigation at this time, and I would
hope that in the very near future I could come and describe to
you the successes of that investigation.
The Chairman. That is great. Another scam that particularly
worries me is the stolen identity refund fraud. A recent GAO
report calculated that the IRS paid at least $5.8 billion of
fraudulent refunds to identified thieves in 2013. Now, this
type of fraud is usually not detected until the refund has
already been issued. As a result, the government must attempt
to recover funds that have already been disbursed to a
criminal, which is no easy task. It would be better if we could
detect more of this fraud before payments are made.
Do you have any suggestions about how TIGTA and the IRS can
detect this type of fraud earlier and stop fraudulent payments
from going out the door?
Mr. Camus. Well, as noted in opening statements by the
witnesses and the committee members, one of the challenges is
that criminals are out there watching the Internal Revenue
Service. They realize that $3.1 trillion goes through the IRS
on an annual basis, $374 billion in refunds. It is a very ripe
target for them. So, as the IRS continues to try to advance its
filters in response to new approaches to the fraud, the
criminals change, because it is such a lucrative environment.
Our audit staff continues to look at the filters that the
IRS has in place and comment and recommend additional or
improved filters. We have seen improvement in some of them, but
it continues to be a major challenge to keep up with the
criminal enterprises.
The Chairman. Well, thank you.
Senator Wyden, we will turn to you.
Senator Wyden. Thank you very much. This has been a superb
panel, Mr. Chairman. Ms. Klem, thank you for the wonderful work
that you are doing in our State, particularly for older people.
I think you know, those are my roots with the Gray Panthers, so
I am really glad that you are out there on that beat. It is
incredibly important.
I want to ask you, Mr. Camus, about this question of the
foreign governments, because it seems to me--and you mentioned
it in your testimony--it is clear that the phone scams, a lot
of them, are originating overseas. It looks to me like this is
essentially an emerging form of organized crime. You are
conducting an investigation, and I recognize that there are
some things you cannot say, but let us talk a little bit about
some of the things that we ought to be looking at from a policy
standpoint.
First, there is the question of whether we ought to be
initiating efforts in terms of work with foreign governments
and what they can do to assist with this. The second is, what
is the appropriate role for local law enforcement, because you
can go after the money runners who collect the payments. In
other words, the rip-off artists are overseas, but they are
going to need money runners to collect the payments.
So let us start with those two, and there may be other
opportunities. I know we have strike forces in terms of
Medicaid, these interagency forces. But tell us a little bit--
nothing that will compromise your investigation--about what we
can be looking at that will give you more tools to fight
particularly the rip-off artists who have done so much damage
from overseas.
Mr. Camus. Thank you so much for the opportunity. Of
course, the challenge when we are dealing with these attacks
being launched offshore is, first of all, getting our hands on
these people. As you pointed out, Senator, the agreements or
working relationships we would have with various foreign
governments can create issues there, and we would ask for help
with that.
The problem we are seeing now is that, because there has
been money paid, we are seeing other spin-offs of this crime.
So, although we are focused and we think we know where it
originated to start, we are now starting to see indications
that other criminals have ripped off the original idea, and now
they are launching these types of attacks.
So it continues to be a challenge, but I think we are onto
something. But it would certainly be something we could use
some help with on down the road as far as getting our hands on
a foreign national and bringing him to justice in the United
States for a white-collar crime.
Senator Wyden. Without compromising the investigation, can
you tell us a little bit--you said there were some problems in
working with the foreign governments. Can you just give us a
little bit of a sense of what those are?
Mr. Camus. Well, as you could imagine, in the world today,
not all foreign governments would feel sorry for the United
States, with our citizens and the integrity of our financial
systems suffering these types of scams. It is one of the
reasons my agency takes this crime so seriously, because it
impugns the integrity of the Internal Revenue Service. So there
are those out there who do not feel bad for the United States
and are not necessarily interested in helping us bring these
types of criminals to justice, sir.
Senator Wyden. Let us move on to the Anthem case, because
this is one that really shows the industrial scale of these
incredible rip-offs, something like 80 million people affected
by cyber-ID theft. They are one of the biggest health insurers
in the country. They have indicated now that 80 million
Americans may have been hacked, opening the way to misuse of
this data, certainly in terms of fraudulent health claims, but
also this criminal enterprise we are talking about today with
ID theft, including tax fraud.
I have raised this question with the Inspector General in
the past. It seems to me that blocking this type of tax fraud
increasingly is going to fall on the shoulders of tax
collectors, both the IRS and the States. So I would be
interested in the panel's recommendations on what else we need
to do to give you the tools to fight ID theft from cyber-
attacks. So, any of you who would like to get into it----
I saw all the State officials already nodding their heads.
Why don't we hear from Indiana first, just to keep things in
the center. I always like to get to the center before the far
right and the far left go at it. [Laughter.]
Commissioner Alley. Thank you, Senator Wyden. Well, in
fact, anecdotally we are seeing a significant increase in the
number of valid stolen IDs in Indiana, with Anthem being based
in Indiana. So we already are seeing the impact of that.
I think many of the steps that corporations all across the
country are having to take involve more multi-faceted
authentication in terms of accessing their systems. I think
many companies have not invested adequately to prepare
themselves for that and it will leave them vulnerable, so I
think that is one key thing that corporate America, and all of
us even at the governmental level, need to focus on.
In terms of what we can do as a group, I think it goes back
to that three-legged stool I spoke about earlier. It is making
sure that we are sharing those information elements more
readily and more rapidly. As Commissioner Valentine indicated,
oftentimes we do get a great deal of information that we share
with one another, but it is not on a timely basis.
I would also really like to see the IRS take a greater
leadership role in terms of driving many of the standards or
expectations. We have 50 States, and many of them do have
taxing mechanisms and Departments of Revenue all doing
disparate things. If we could have the IRS help us to bring
everybody together to establish a coordinated, collaborated set
of standards and expectations from our software vendors, from
financial institutions as well, I think that could do a great
deal to bring everybody together on the same platform.
Senator Wyden. My time is up. That sounds too logical, so
we will have to pursue it. Thank you.
Thank you, Mr. Chairman.
The Chairman. Senator Thune, your turn.
Senator Thune. Thank you, Mr. Chairman. Thank you and
Ranking Member Wyden for holding this important hearing. Thank
you to our panelists for being here and for their willingness
to testify.
I think every taxpayer ought to feel confident knowing that
their personal tax information is secure when they file it with
the IRS and that there will not be a false return fraudulently
filed in their name.
I think we all know and have seen the devastating impact
that tax-related identity theft can have on a family's
financial well-being, so I appreciate the committee's interest
in the subject, and I hope we are able to move legislation
forward in Congress.
One measure for preventing tax-related identity theft that
has been recommended by a number of commentators is for the IRS
to verify information from third parties, such as the Social
Security Administration. I am wondering what your thoughts are
about how much fraud that would prevent, and are there any
potential downsides to that approach? I would just throw that
open to anybody who would like to comment on that.
Mr. Camus?
Mr. Camus. Sir, thank you. Our auditors look at that on a
regular basis, and they are in the middle of doing some audit
work right now. But generally speaking--and Mr. Valentine
pointed it out--the fact that the IRS does not have in its
automated system a W-2, for example, to match at the same time
the taxpayer files a return, that inhibits their ability to do
a very simple validity check before issuing a refund.
There is a great expectation to get the taxpayers a refund
as soon as possible, because after all it is the taxpayer's
money. So anything that we can do to increase the timeliness or
to get the time the taxpayer can start filing their return--
which this year was January 20th--to jive with the time
theSocial Security Administration has the W-2 information,
which really is not due until March 31st, I think that would be
a big help.
Senator Thune. All right. Does anybody else want to comment
on that subject, or are there any downsides to that approach?
Mr. Valentine. I am not aware of the downsides, other than
the fact that there would be more information being transferred
and places for it to be leaked out.
But there are actually three areas that can really affect
the fraud issues. The one is on the front end, which is the
authentication issue, which is what you are speaking of. The
next one is in the discovery phase, which is those transfers of
information that occur back and forth between the various
different tax agencies. The third one is the method that you
use to pay. That is why the suggestions that I made really
tried to affect all three of those. Any one of those is
helpful, but you need to approach it, I think, in all three
areas. If you do that, then you can really have a better chance
of actually cutting the frauds down.
Senator Thune. All right. Thank you.
It has been a number of years since Congress enacted a
Taxpayers' Bill of Rights. When a taxpayer has a fraudulent
return filed in his name, is the recourse with the IRS
sufficient?
Mr. Camus. Again, our audit staff looks at that: what the
victim experience is like when they contact the Internal
Revenue Service, what type of service they get, and what the
IRS does to help the taxpayer victim. We are continuing to look
at that and audit and recommend changes or improvements in that
program.
Senator Thune. And I was going to say, are there additional
measures that ought to be considered to make it easier for
individuals who find themselves in that situation to get the
assistance that they need?
Mr. Camus. Of course, it is a very traumatic issue for the
victim. Anytime anybody's identity has been compromised, they
are very, very upset. Again, I am not ready to comment on where
we are and what we are doing, but I do understand from our
auditors that there has been improvement, and they continue to
work and look to make that experience better for the victim.
Mr. Valentine. Senator, I can tell you, in the State of
Utah we have a Taxpayer Services Division which focuses exactly
on the issue that you are raising, and that is, when someone
claims that they have a fraudulent return, they have to have a
way to be able to process it quickly without having to go
through the whole State bureaucracy.
We have done that with our Taxpayer Services Division in a
quiz letter that we send out to be able to authenticate that
the person who is calling us is in fact the right person. That
kind of thing may be something the Service could consider as
well, to really have a way to expedite a particular complaint
of identity theft.
Senator Thune. Just very quickly, there have been recent
breaches involving TurboTax that have made national news. Is
there a reason why TurboTax has experienced this but other
electronic providers of tax service have not? How preventable
is this?
Commissioner Alley. I am not so sure that others have not
also been impacted. I think perhaps we have realized it and
directly identified the particular breaches that occurred with
the one vendor--which they have taken additional steps to try
to mitigate--but I think we are finding in Indiana that it is
not just TurboTax that has been impacted by this. I think the
fraudsters are moving. I mean, they move with great agility. As
they impact one and have success and those doors close, then
they readily move to another open door. So I think it is a
systemic issue and really broad across the entire industry, not
limited to any particular vendor or party.
Senator Thune. Thank you. Thank you, Mr. Chairman. Thank
you all very much.
The Chairman. Senator Warner?
Senator Warner. Well, thank you, Mr. Chairman. Thank you
for holding this hearing. We all have stories from our
constituents. We hear the same kind of stories in Virginia.
Mr. Chairman, one of the things that I think we could do
that comes to my attention is--Senator Ron Johnson and I have
some legislation on this--the IRS currently interprets the law
as saying that if they find out that you have been the victim
of identity fraud, they do not even have to tell you as a
citizen that you are the victim of that fraud. They do not have
to notify law enforcement. So, on the notion of whether I
believe they could do it administratively, we have written to
them.
Perhaps you and the ranking member writing them might shake
them up a little bit more. But if we cannot get at it
administratively, one step that we could take would be making
sure that the IRS is actually a partner in this effort in
identification. When it comes to their attention that somebody
has been a victim of identity theft, we notify the victim and
law enforcement. I think we see some nods from the panel there.
Again, the numbers are huge, as you pointed out in your
testimony: $5.8 billion in 2013.
A second item that I think we ought to consider is--and
this is something I have been working on in the Banking
Committee; I know Senator Carper walked in briefly--some level
of mandatory data breach reporting. It is a very gray and
developing area.
When, particularly on the retail side, we have a data
breach--we have seen countless indications of data breach, but
there is no obligation, there is no standard yet, about when a
company needs to report this information. I think there needs
to be such a standard.
One of the things we have urged from the Banking Committee
side is that--this is an area where there is a lot of finger-
pointing between the retail sector and the financial sector,
and rather than creating another interchange battle, we should
try to have the financial sector and the retail sector actually
collaborate better. I am going to get to a question here.
It would seem to me as well, and one thing that I would
like the panel's comments on is, is there not a way, either
through the IRS or in collaboration with the private providers,
the TurboTaxes--I agree with the panel's comments that this is
not just a TurboTax problem, this is not something that can be
simply solved by governmental entities. We need the private
sector, which has a very vibrant business, as all.
Why have we not created a single easy-to-use portal so
that, for Mrs. Smith or the lady from the story in Utah, there
is a single place where you can at least check whether this is
a real claim or not? I mean, do you all want to speak to that
notion of how we do a better job of consumer education and why
we have not had the IRS more active in having, perhaps in
collaboration with State tax departments and others, an easy-
to-find site? And frankly, what would be the responsibility as
well of the private-sector providers, the TurboTaxes and
others, to collaborate with that one single portal?
Mr. Valentine. With the remaining time left, there are two
issues that you are really raising. One is the notification
issue, and the second one is, how does the taxpayer easily
check to see if their return has been filed? Utah actually
tried to address both of those issues by having a real-time
notification that we believe your return has been hacked or
that your return has been filed. We actually tell them.
Senator Warner. Unlike the IRS.
Mr. Valentine. We do not have the impediments that the IRS
has in that regard.
The second one is that we have an easy system now for
taxpayers to check whether a return has been filed or not. We
call it our Taxpayer Access Point or TAP system. You go to our
Tax Commission website and you fill out the authentication
issues.
Once you have done that, you can determine whether your
return has been filed. So we have been doing public service
announcements saying, please check to see if your return has
been filed. If your return has been filed and you have not
filed it, here is the number to call.
Senator Warner. Well, would it not be potentially better to
have some national education process here since, again, the
disproportionate amount of the fraud is taking place at the
Federal level rather than the State level?
Mr. Valentine. I would agree.
Senator Warner. Commissioner, do you want to----
Commissioner Alley. Yes, I would agree as well. It is just
a matter of finding the resources and the funding and getting
all the players collaborating with one another at the same
time. But I think it represents an ideal scenario that should
be played out, and we need to strive toward that. We just have
to get it started, and we have to have the leadership.
Senator Warner. I know my time is up, Mr. Chairman, but I
would simply say that when we are looking at $5.8 billion in
fraud--the Washington Post says this year we have seen a 37-
fold, 37 times increase in potentially fraudulent claims--the
ability to have a little bit of resources to have that common
site, number one, and two, either by administrative change or
legislative change, making sure the IRS actually informs people
when they know they have been the victim of identity theft, I
think would be steps in the right direction.
Thank you.
The Chairman. Well, thank you so much, Senator.
I might add that Senator Grassley is chairman of the
Judiciary Committee, and he asked that I ask this question of
you, Mr. Camus, and then we will turn to one of the other
Senators.
On behalf of Senator Grassley, the Treasury Inspector
General for Tax Administration, or TIGTA, has detailed how IRS
needs to do more to reduce improper payments for the Earned
Income Tax Credit and the Child Tax Credit. For 2013, about
$14.5 billion in improper EITC payments were made, and between
$5.9 billion and $7.1 billion for the Child Tax Credit.
Now, both of these credits pay cash benefits for exceeding
any tax paid, making them a prime target for anyone looking to
engage in tax scams or ID fraud. At the same time, the rules
governing both these credits are complex, opening them to
innocent human error.
So the question is this, Mr. Camus. In your opinion, what
amount of improper payments would you attribute to fraud versus
innocent taxpayer error, and do you suspect that at least a
significant amount of improper payments are the result of
fraud?
Mr. Camus. Well, it is clear that the fraudsters, as we
pointed out today, look for any opportunity whatsoever to get
at money, and they are ruthless in their attempts. The fact
that they would use credits that are legally available to folks
filing tax returns is not a foreign concept. I just do not have
that information available, but I would be happy to meet with
my audit staff and try to get a response to Senator Grassley.
The Chairman. If you would, I would like to have that
response as well.
Mr. Camus. Yes, sir.
The Chairman. Well, thank you.
Senator Isakson?
Senator Isakson. Thank you, Mr. Chairman, Ranking Member
Wyden. I appreciate the opportunity.
Ms. Klem, last week I returned home to Atlanta from a week
in Washington, and when I walked in the back door, my wife--
whose name, by the way, is Diane--said, ``You need to listen to
the voice mail I saved from the telephone this week.''
It was precisely the call you talked about, where a woman
with a very convincing voice informed me that the IRS had
determined I owed them a substantial amount of money and that I
should call a 202 number as quickly as I could or they would
file suit next week. Fortunately, being a member of this
committee, I realized that probably was not true. But the next
morning, ironically, I was doing a free-file event with the
director of the IRS in the Atlanta region and gave him the
telephone number to follow up on.
When I gave him that number, he said, ``Well, this cannot
be real, because we do not make any solicitation by telephone;
every one is in the mail.'' I thought to myself, ``I should
know that,'' but the American public ought to know that as
well.
So it would seem like there would be more ombudsmanship on
behalf of the IRS, and maybe even the IG or the Treasury, to
let taxpayers know that there are no enforcements by phone,
they are all done by mail, because that is a real problem, and
it was a very convincing phone call.
Ms. Klem. Yes. Thank you, Senator. It is very common, and
it is very upsetting when that call comes in. That is precisely
why this scam is so successful. We do have partnerships on a
local level with our counterparts at FTC, the IRS, and others,
and we do share information like this infographic that is in
front of me right now, which is a really great infographic--I
am happy to share it with the committee--about the IRS imposter
scam.
It says: ``Warning Signs: How Will the IRS First Contact
You? By Phone? No. Email? No. By Mail? Yes.'' It is very clear
to see, but this is not widely disseminated, and so we need to
do a better job of getting that into the hands of the general
public.
Senator Isakson. That is the point I wanted to make. If the
chairman would listen, or Ron Wyden would listen for a second,
I want to make a point. One of our problems is, we do not have
a game plan or a point man to get the consumer information out
there, and that has been said by a number of you. We have a
department that was created by the administration called the
Consumer Finance Protection Bureau, which is in the business of
protecting consumers.
It would seem like Secretary of Treasury Lew would contact
Richard Cordray and this would be a perfect way for them to use
their investigatory and solicitation arm that tries to help
people who are victims of business fraud, to protect them from
tax fraud as well. I think that is something that Treasury
could do.
Mr. Camus. Yes, sir, Mr. Isakson. As a matter of fact, we
have touched base with the Consumer Finance Protection Bureau,
so we are going to include them. The majority of our focus has
really been with the Federal Trade Commission and the IRS. The
IRS has been putting out YouTube videos, and I myself have been
interviewed.
I will take any television interview that is put in front
of me, not because I am a ham, but because I believe in my
heart that if we protect one taxpayer from having these
horrific stories, that is a good day for us. I am so happy
about this hearing because I am hoping that this will also help
get the word out that when you get those calls, please hang up
the telephone. But I really, really appreciate it, and we are
trying to work with that bureau.
Senator Isakson. And I hope Director Cordray will be as
aggressive on protecting people from tax fraud as he is from
other frauds in society.
Ms. Ciraolo, I represent Georgia, where Ft. Benning is
located. I noticed in your testimony that a member of the
medical team at Ft. Benning stole the information and
identification of a number of soldiers at Ft. Benning, and tax
fraud was perpetrated against them.
Did you coordinate with the Department of Defense once that
was determined to try to get the word out to DoD that they need
to watch out for those who would take advantage of their
position with the government to steal the identity of our
soldiers?
Ms. Ciraolo. Senator Isakson, thank you for that question.
I joined the Department 2 months ago, so I was not involved in
those types of discussions. I do not have that information with
me today, but I can certainly report back on what efforts were
made with the Department of Defense. We certainly take
seriously any allegations and efforts by offenders to commit
these offenses, and we are particularly focused on the
vulnerable victims of our society, including our military
members.
Senator Isakson. Well, as chairman of the Veterans' Affairs
Committee, I am going to take the initiative to do the same
thing too, so, if you would do that with DoD leadership, I will
do it with Veterans' Affairs leadership as well.
Ms. Ciraolo. Of course.
Senator Isakson. My last point is this. Each of the State
Directors made a comment about information sharing, if I am not
mistaken, and that would be a key to stopping this. One of the
problems that exist is the U.S. Senate and House have not done
a cyber-security bill, and, in the pending bill that we hope
will be before us soon, there are provisions for idea sharing
and exemptions from the anti-trust laws, so information can
flow to the government to enforce against tax fraud and things
of that nature that are used by cyber-security.
So I would hope we will get the message that we are part of
the problem. Our cyber-laws are way out of date with our cyber-
criminals, and the quicker we in Congress act on that
legislation, the more taxpayers will be safe from fraud. That
is my only editorial comment.
The Chairman. Well, thank you, Senator.
Senator Casey, you are next.
Senator Casey. Mr. Chairman, thanks very much. I appreciate
the hearing and want to thank the witnesses for your testimony,
your presence, and your commitment to stopping this crime.
I am struck by what I have seen in Pennsylvania. I am sure
this could be replicated in many States, but I am just looking
at a small sampling of headlines. This is from a television
station in Erie, way up in the northwest corner of our State.
The title of the news article about which they were reporting
was, ``IRS Phone Scams Ramp Up in Erie.'' Then we go to the
other end of the State, literally, the Lehigh Valley over by
the eastern border of our State: ``IRS Scam, Widespread in
Pennsylvania, Reported in Lehigh Valley.'' Then, in my home
area of northeastern Pennsylvania: ``IRS Phone Scam Reaching
More in Northeastern Pennsylvania.'' So this is, again, a lot
of what you have heard and a lot of what you have had direct
experience with trying to stop.
I would start with Assistant Attorney General Ciraolo. I
have a particular question about your assessment of kind of
where we are in light of what I have seen, and what I am sure
others have seen. I was in Berks County, which is on the
eastern side of our State, a number of months ago with the
District Attorney, John Adams. Mr. Adams was kind of walking
through some of the basic challenges from a prosecutorial
standpoint.
He emphasized, among other things, that the perpetrators
are, first, highly organized, and two, often reside in
jurisdictions far away from the victims, and also beyond the
reach of local authorities. And he even pointed to, as you have
all seen, I am sure, perpetrators residing in foreign
countries. So those are among the many challenges that much of
your testimonies pointed to.
I do not want to be pessimistic, because I do want to get
to the part of your testimony where you talk about what has
been happening with the Justice Department and some of the
success you have had, but there is, I think, a sense, because
of the scope and gravity of the problem, that we are not
winning. I want to just, from a national perspective, ask you,
how would you assess the war or the battle?
Ms. Ciraolo. Thank you, Senator Casey. The Tax Division has
a dual role in these matters. We prosecute the offenders, and,
in doing so, we hope to change the calculus for would-be
offenders with the substantial sentences that we are receiving,
and we are receiving substantial and increasing sentences.
In addition, we share information we obtain from these
cases in real time with the IRS which, it is our understanding,
is working very hard to improve its filters to better identify
fraudulent returns and to prevent the issuance of fraudulent
refunds. So that is the Tax Division's role. These cases
certainly present unique challenges, and we will continue to
devote our available resources in this area.
Senator Casey. And I guess I would ask, starting with you
and going down with your colleague from Treasury and others,
and I know much of what you might say in the short answer--and
it has to be short because of the time--is already imbedded in
your testimony. But if you had to itemize one, two, or three
action items that we could work on, resources or other tools
that you need to do your job--and I am sure others who may not
be in the Federal Government but play a role in this--what do
you hope we would do by way of authority or authorization or by
way of appropriation?
Ms. Ciraolo. Senator, I think that holding hearings like we
are having today is critical to getting the word out to the
American public--our elected representatives taking the message
back to their home States and making sure the information is
out there as often and as loudly as possible.
Many of these scams can be stopped if the American public
is educated, and having a centralized location for that
information, I think, is a wonderful idea. I am very happy to
see the representatives here on the panel from across the
country. It gives me hope that we will see further information
in the future.
Senator Casey. Thank you. I would maybe ask each of the
remaining witnesses to do a 15-second, ``What should Congress
do?''
Mr. Camus. I echo what my colleague said. From a standard
law-enforcement point of view, the scam is so simple. We will
never be able to prevent somebody from picking up the phone
claiming to be another person and demanding money. It is public
awareness at the top of it. When the money dries up, the
criminals will go away. But getting our hands on them, and
bringing them to justice in the historic way, is one of the
things we want to do because we want people to pay for this,
but it is not a solution to the crime. It is people hanging up
the telephone and not being victimized.
Commissioner Alley. The criminals are going to continue to
be very agile, so, as we close one hole, they will open a new
one. But I think the greatest thing we can do is to ensure and
require greater collaboration among all the groups, as well as
provide some funding to ensure that that collaboration can take
place.
Senator Casey. Commissioner, thank you.
Mr. Valentine. A final comment is that you still have to be
able to cut off the vector that is used to be able to receive
the money, and I think the identification of it is something
Congress can require the financial industry to do, to say, you
know what? We just have to know that this series is going to be
a pre-paid debit card. We will not refund it that way, we will
refund it by a check at that point.
Senator Casey. Thank you.
Ms. Klem. And, Senator, I would echo the comments about
education and raising awareness around the issue. I travel the
State every day and speak to mostly older adults about this
fraud, and it is just devastating to hear their stories.
Frequently after they have shared them with me they say, gosh,
I wish I had talked to you last week. So, if we can get more
awareness, more education, more media spotlight, that would be
great.
Senator Casey. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. Well, thank you.
Senator Cantwell, you are next.
Senator Cantwell. Thank you, Mr. Chairman. I would like to
join my colleagues who have been bringing up these issues about
identity theft and fraud, but specifically to point out that
the 111th Congress increased the IRS's responsibility while
decreasing the funding, so the IRS is now responsible for
implementing the Foreign Account Tax Compliance Act, and the
program is in effect for calendar year 2015.
So, in addition to the additional required legal tasks
lawmakers will have, the IRS is being urged here--which we
really want you to do to combat identity theft--to reduce
errors in Federal tax programs and generally reduce tax fraud.
So I just think we need to take this into consideration as it
relates to the budget this year and make sure that the
resources are there to do this.
I am concerned that taxpayers will ultimately--we need to
get a handle on what has been happening with identity theft. It
was found that the IRS closed 22 percent of the identity theft
cases without taking the appropriate steps to fully resolve the
victim's account.
So, examples include victims not receiving refunds, or IRS
failing to update the victim's address so they could receive an
Identity Protection Personal Identification Number. During
fiscal year 2014, nearly 270,000 identity theft returns of this
type were closed, so, if that reported rate, 22 percent, is
accurate, about 60,000 taxpayers were burdened by having their
cases closed in a premature fashion.
So what do we need to do to fix that?
Mr. Camus. That is a job that would fit in our audit
staff's portfolio. When they look and see how the IRS is doing
with their identity theft program, one of the things I always
look at is the victim interface and how the IRS is processing
the claims and the correspondence. I know that the auditors are
doing work in that area as we speak.
Senator Cantwell. But will we have this resolved for this
tax season so we are not prematurely closing cases?
Mr. Camus. Unfortunately, it is always in hindsight, in the
rear view mirror that the audit team looks at the work that was
done in a particular filing year, because they need to wait
until the cases are closed before they can look back and see
how they were handled. So I will share the sentiment.
Senator Cantwell. Anybody else? Do you, Mr. Alley, or does
anybody else have any thoughts about this? I mean, we need to
do something better than to have these taxpayers affected this
way.
Commissioner Alley. I agree. I mean, it creates a
tremendous amount of anxiety among the taxpayers. I mean, we
also have Taxpayer Administration Services to work with our
taxpayers who have been compromised with their identities to
ensure that they receive the comfort and knowledge that their
return has been properly reflected in their account and
properly accounted for. We need to do the same thing at all
levels.
Senator Cantwell. Well, Mr. Chairman, I know that
practically every committee has been asked to address the ideas
of cyber-security and move forward, and I think our committee
should certainly look at this particular aspect of making sure
that our tax filers are also secure as well. So, thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Cantwell.
Senator Wyden has another question.
Senator Wyden. Thank you, Mr. Chairman. I just did not want
to wrap up without giving you a chance, Ms. Klem, to talk about
seniors, because I think we know how outrageous it is that
seniors get ripped off this way. I mean, we have millions of
older people in this country who are walking an economic
tightrope every single day. They balance their food bill
against their fuel bill, their fuel bill against housing costs.
They get ripped off this way, and it is not some
abstraction. They really suffer. So, as we wrap up, I just
wanted to finish with this. What else do you think this
committee can do to help beef up the fight to protect seniors
from these kind of rip-offs?
Ms. Klem. Senator Wyden, that is a great question. It is
true that this particular imposter scam disproportionately
affects vulnerable adults, especially older adults. They are
home during the day; they answer their phones. That is because
they grew up in a time where they were taught that it is rude
not to answer the phone and listen to the caller on the other
end.
So I think some of the suggestions we have heard today are
wonderful, but I am going to keep beating the drum of education
and awareness. I think that that is really key. I think if we
can let people know that this is a notoriously awful scam and
that they should be alert to it and it is not rude to hang up
the phone, in this particular case, I think that is a wonderful
educational tool for people, especially older adults. It is
very tough. I talk to them every day.
It is going to be a struggle, but I think the more
information and awareness we can get out there, the better. I
always tell people who come to my presentations or call me on
the phone to share their stories with one or two other people,
because I think that personal story, that personal touch from
somebody who maybe got that phone call and almost fell victim
or did fall victim, letting others know, is important.
Senator Wyden. Thanks for the good work you are doing.
Ms. Klem. Thank you.
Senator Wyden. Thank you, Mr. Chairman.
The Chairman. Well, thank you, Senator.
Senator Menendez?
Senator Menendez. Thank you, Mr. Chairman. To all of our
witnesses, thank you for your testimony.
As many have noted, identity theft and tax schemes are some
of the fastest-growing crimes in the United States. Not only do
the victims, who are disproportionately low-income and
vulnerable populations, lose millions of dollars to these
schemes each year, they are also subject to, as Ms. Ciraolo
noted in her testimony, months, if not years, of overwhelming
paperwork, credit problems, and inconvenience.
One constituent of mine, whom I will just refer to as
Sandra, experienced this nightmare firsthand. She contacted my
office in March of 2013 to request help in order to restore her
identity, which had been stolen in 2010. She did not receive
her tax refunds for 2010, 2011, and 2012 and was getting
nowhere with the IRS over fixing this situation.
Finally, after an additional 2 years--2 years--of working
with her, the IRS, and the Taxpayer Advocate's Office, we were
finally able to resolve the situation earlier this year. So,
Mr. Camus, is the IRS doing enough to resolve cases of identity
theft in a timely manner? Is the 4- to 5-year waiting period
that Sandra experienced acceptable, in your view?
Mr. Camus. In my personal view, no, because I am a criminal
investigator, and I know how horrific that type of an
experience is for an individual. But I can tell you, based on
the audit work that I have read done by my agency, that the IRS
has made great strides in trying to be better, faster, and more
responsive to the victims.
One of the things that they put in place was an identity
theft victim PIN that, in the future years when the taxpayer
files, they use to help validate their identity. I understand
they are not always 100-percent on that either, but my
observation from reading the audit reports that the audit staff
has done is that they are making great strides and they are
endeavoring to improve.
Senator Menendez. What would you say is the status now of
somebody who finds themselves in a situation like Sandra? What
would they reasonably expect to be the period of time that
their issue would be resolved?
Mr. Camus. My understanding is that it would be much better
than it was in 2010, 2011, and 2012. But whether or not it is
up to par----
Senator Menendez. Four to 5 years was her experience, so
better is a relative question. What would you say? What is the
average: a year, 2 years?
Mr. Camus. Yes, sir. I wish I had that information
available, but I do not.
Senator Menendez. Well, I would love to get it from the IRS
at the end of the day.
Let me ask this. Commissioner Koskinen testified before
this committee in February about the issue of unscrupulous tax
preparers. In responding to a question I raised, he said, ``The
IRS is very concerned about unscrupulous taxpayers'' and that
there is ``a percentage who are crooks, and then there are ones
who are a major part of the problem of fraud across the
board.''
Now, I know the IRS tried to regulate paid taxpayers a few
years ago and was rebuffed by the D.C. Circuit Court of
Appeals, which argued Congress has not explicitly authorized
such legislation. I personally find it exceedingly strange and
inappropriate that many States require hair barbers to have a
license, but someone filing very complicated tax returns does
not need a license.
So, Mr. Camus, how critical is it for the IRS to be able to
regulate tax preparers, and would doing so reduce the amount of
fraud and identity theft?
Mr. Camus. I think it is critically important for anybody
who does such an important job in such an important area as tax
administration, that there is training available and they are
held accountable and there are standards that have to be met.
I know we work closely with our partners in IRS Criminal
Investigation and the Department of Justice Tax Division, when
we come across an unscrupulous tax preparer, to bring them to
justice. I think it is critically important that those
individuals whom elderly folks and other people trust and
depend on to file very complicated forms--because they do not
understand--do not become victimized by the very people whom
they trust.
Senator Menendez. Well, let me ask you this. Can you or Ms.
Ciraolo quantify for me in any way how much fraud is related to
unscrupulous tax preparers?
Ms. Ciraolo. Senator, we share your concerns with respect
to fraudulent tax preparers and believe that the U.S. taxpayers
who engage a preparer should be able to trust that person to be
competent and qualified to prepare the returns and to prepare
an honest and accurate return. In the last year alone, the Tax
Division has obtained injunctions against more than 40
fraudulent preparers and promoters and will continue to
prosecute those individuals who willfully assist in the
preparation of fraudulent returns.
Senator Menendez. So do you have any idea how many tax
preparers--this is my final question, Mr. Chairman--how many
tax preparers there are?
Ms. Ciraolo. Senator, I do not have that information in
front of me today.
Senator Menendez. Is that number based on complaints, or is
it based on the 40 that you--it sounds like a small number
compared to the universe of preparers that I would assume are
out there. So is that based on complaints, or is that based on
the Service's own investigations?
Ms. Ciraolo. The Tax Division works with the Internal
Revenue Service in identifying fraudulent preparers, and, based
on the evidence that we have received, we follow that evidence
where it leads and pursue injunctions, where appropriate,
against preparers.
Senator Menendez. Do you have a number of complaints filed
with you?
Ms. Ciraolo. I can tell you that, since 2000, we have filed
over 500 injunctions against fraudulent preparers.
Senator Menendez. All right. Thank you, Mr. Chairman.
The Chairman. Well, thank you, Senator.
I want to thank all our witnesses for appearing here today.
I also want to thank all the Senators who participated. I think
this has been a very good hearing, and hopefully we can move on
from here.
Any questions for the record should be submitted no later
than Thursday, March 19th. This hearing will be adjourned at
this point. Thanks so much. Thanks to all of you. We really
appreciate it.
[Whereupon, at 11:30 a.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Mike Alley, Commissioner,
Indiana Department of Revenue
introduction
Chairman Hatch, Ranking Member Wyden, and committee members, thank
you for inviting me to discuss this important topic with you today.
Senator Coats, thank you for that kind introduction. On behalf of
Governor Mike Pence and the citizens of Indiana, it is my honor to
appear before you today to address this critical issue that faces
everyone in the tax and revenue processing industry.
You have asked me to discuss Tax Schemes and Scams During the 2015
Filing Season. Specifically, I would like to illuminate the identity
theft and tax refund fraud experiences of Indiana over the last two
years and note the extent of this challenge facing all government
entities in today's environment. And I can tell you from first-hand
experience that this is a problem that must be addressed at multiple
levels. This morning I would like to address this issue from three
perspectives:
First: The nature of the problem and its overall breadth.
Second: Steps Indiana has taken in an effort to combat the problem
and lessons we have learned.
Third: Recommendations from our perspective on additional
approaches we must take to more fully and effectively address
this epidemic issue nationwide.
the nature of the problem
Tax refund fraud is one of several lucrative platforms for
criminals to monetize the value of stolen identity information. It is
being perpetrated by thousands of culprits from the small time
individual fraudster to large, sophisticated criminal enterprises. In
the past, it has been very easy with negligible risk of apprehension or
prosecution. The advent of electronic filing and processing has
enhanced the ability of criminals to utilize economies of scale in
filing large volumes of fraudulent returns, at a nominal cost,
replicating numerous returns with only minor changes in original
identity information. The zeal of departments of revenue to speed up
the processing of returns and reducing turn-around time for refunds--
all in the spirit of good customer service--also has contributed to the
problem making it easier for criminals to take advantage of the system.
Our systems were designed to process rapidly and efficiently--not to
screen for fraud and fabricated identities.
The Identity Theft Resource Center,\1\ in their 2014 Annual Report,
created a diagram that effectively illustrates the interrelationship of
the criminal activity and our oftentimes disjointed responses. We must
develop a coordinated effort to battle ID theft and mitigate the risks
of misuse.
---------------------------------------------------------------------------
\1\ http://www.idtheftcenter.org/images/page-docs/
2014AnnualReport20150227.pdf.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
In calendar year 2014, twelve percent of the total tax refund
dollars requested from Indiana was found to be fraudulent. We
identified more than 78,000 fraudulent tax returns filed using
manufactured or stolen identities, and prevented more than $88 million
in fraudulent refunds from being issued. This mirrors similar
statistical reports from the U.S. Government Accountability Office that
reports the IRS lost an estimated $5.8 billion to fraudulent refund
claims in 2013 while blocking about $24 billion in attempts. They
further reported that suspected identity theft incidents for 2013 were
nearly 2 million, an increase of more than 350% from 2010. We hear
anecdotally from other states that they also are experiencing
---------------------------------------------------------------------------
comparable fraudulent activity.
Though early in the 2015 filing season, we are already seeing a
dramatic increase in the use of valid identities which have been
stolen. With the advent of reported successful hacks at many large U.S.
companies, we believe the availability of valid stolen identities for
tax fraudsters has never been greater. This is particularly concerning
because stopping fraud with valid identity information is much more
difficult than screening for manufactured identities which was the most
common practice of fraudsters in the past. The fraudsters have upped
their game and we must respond accordingly.
what are we doing in indiana?
In Indiana, we knew we were suffering some tax fraud based on
identity theft, but we did not have a reliable method to calculate the
actual impact. In 2012, we began conducting research and analysis of
our processes and statistical filing results. We noted that it appeared
Indiana was processing more returns and paying out more money in tax
refunds than seemed reasonable based on our estimated population
growth. Figure 1 (Return Growth) illustrates the growth of our total
returns (Red Line) compared to our total refund returns (Blue Line).
The green bars show our overall electronic filing percentage. The
growth of two hundred thousand taxpayers in a just a couple of years
strained credibility, so we looked for other reasons why we would be
getting so many more tax returns.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Our analysis determined that identity theft and refund fraud was
the most likely explanation for the accelerated growth in returns and
refund requests. Once we identified these phenomena, we brought key
staff together and worked with the office of Governor Pence and our
General Assembly to develop a strategy to define elements of an
effective identity fraud program for the Indiana Department of Revenue.
Key objectives of our approach were:
1. Ensure that we do not mistreat legitimate taxpayers because
of a small number of dishonest individuals.
2. Protect taxpayer dollars and taxpayer identities.
3. Protect state revenues from issuance of fraudulent refunds.
4. Identify the criminals for deterrence efforts.
5. Ensure fraudulent dollars do not affect our revenue based
distributions and financial reporting.
These became the guidelines that our identity protection team would
follow. We knew that we needed to make significant systemic
modifications and we needed to do it before the next tax season. Staff
reached out to our fellow states through the Federation of Tax
Administrators (FTA) and our partners at the IRS to see if there were
ideas that we could borrow and implement.
The response was very supportive and we were welcomed to view,
visit, and exchange ideas with our counterparts across the United
States. Many of them had partial solutions or had tried to implement
incremental improvements. The time we spent working with other states
confirmed that Indiana was less prepared and needed to catch up. On the
positive side, we discovered that there were ready-made commercial
solutions that we could bring to Indiana that could have a major impact
in a short period of time.
Governor Pence reviewed the data we provided and the potential
solutions the department suggested. With his support, we initiated a
pilot program to screen all returns for suspicious identities. The
program used LexisNexis, a third party commercial vendor, to screen the
returns and note identity information such as name, address, social
security number, or other identifier information that appeared
suspicious. Processing of those returns screened as suspicious was
suspended and an identity confirmation quiz request was sent to the
taxpayer at their filing address. Taxpayers were asked to confirm their
identities by completing a short quiz. They could log into a secure
website or could call our call center where we had dedicated analysts
to handle their quiz. As a result of implementing this pilot effort the
department expected to directly reduce fraudulent refunds by $25
million with an investment of $8 million in staffing and technology.
Our actual results confirmed more than $88 million of attempted refund
fraud identified and stopped with $42 million attributable directly to
this identity screening tool.
The identity confirmation quiz is very powerful and made a
significant difference. But it is not a panacea. It is only part of a
larger process to strategically focus on identity theft and refund
fraud which encompassed additional talent, new procedures, and new IT
systems. We made it clear in the beginning that the department would
need to make systematic changes. We took the following steps:
1. Procured an identity confirmation vendor (LexisNexis)
2. Hired additional staff
3. Conducted a public relations campaign
4. Made agreements with software vendors to begin setting
standards
5. Began modernizing infrastructure to specifically confirm
identity information and recognize fraud trends
Figure 2 (2014 Indiana Fraud by Source) demonstrates that we
stopped more than $88 million in fraudulent refunds being paid to
manufactured or stolen identities in the pilot year alone (2014). The
identity screening via the identity confirmation quiz was the simplest
fraud to stop and we took advantage of that simple process to
concentrate on the more sophisticated fraud schemes using our enhanced
professional analysts and early analytics.
------------------------------------------------------------------------
Source # of Returns Description Total Refunds Stopped
------------------------------------------------------------------------
Analyst 34,300 Investigation $45,642,625
Review and decision
by trained
fraud
prevention
staff
------------------------------------------------------------------------
Identity 43,918 No response to $42,426,289
Confirmatio Identity
n Quiz Confirmation
Quiz
notifications
------------------------------------------------------------------------
Calendar $88,068,914
Year
2014
Total
------------------------------------------------------------------------
Figure 2: Indiana 2014 Fraud by Source
In one sense, the $88 million was gratifying--but it was also
astonishing. The problem was much larger than we had anticipated. The
end-of-year fraud statistics were interesting as well. Almost four
percent of returns we processed in 2014 were identity fraud. A
surprising data point was that these 78,000 returns represented 12% of
the value of all refund requests. While this was higher than expected,
it makes sense when we consider that the fraudsters are attempting to
maximize their profitability. We also identified that Indiana paid out
$4 million in identity fraud refunds that we later identified as
fraudulent but were unable to stop. Some fraud gets through before we
can identify a new pattern and react. This illustrates that our efforts
to identify and stop refund fraud must continue.
We could not have achieved these positive results without
additional resources and multiple components to our identity theft and
refund fraud program, including an $8 million augmentation to the
department's budget. Indiana added 15 call center people to assist our
taxpayers with the identity confirmation quiz. We also added eight
additional fraud analyst positions, a prosecutor with fraud experience,
a public relations professional, and information technology
professionals.
Our public relations campaign was critical to our success in
educating citizens, rallying market professionals, and explaining the
outcomes to stakeholders and media. This allowed us to alert our
taxpayers that protecting their identities was a priority for us and
though it might slow down the refund process slightly, it would better
ensure protection of their identities and avoid a strain on state
finances. Further, it provided assurance that if they should receive an
identity confirmation quiz, it was legitimate and no cause for alarm.
One quiet, but crucial, key to our success was gaining more control
of the interfaces and behavior of our software vendor partners. During
the 2014 filing season, we began tracking fraudulent returns submitted
by each software vendor. As the Fraud by Software Vendor Table (Figure
3) clearly demonstrates, there was a large variability among software
vendors of the incidence of fraud. The data shows that some vendors are
taking fraud seriously and implementing protective screening while some
are either unaware of, or unable to stop fraud. A few vendors claimed
that they were not responsible for doing any fraud prevention at all.
----------------------------------------------------------------------------------------------------------------
Fraud by requested refund amount
Fraud by Refund Return Count (%) (%)
----------------------------------------------------------------------------------------------------------------
Highest 92% 85.0%
----------------------------------------------------------------------------------------------------------------
Average 22.3% 11.0%
----------------------------------------------------------------------------------------------------------------
Median 6% 2%
----------------------------------------------------------------------------------------------------------------
Mode 1% 1%
----------------------------------------------------------------------------------------------------------------
Lowest 1% 0%
----------------------------------------------------------------------------------------------------------------
Figure 3: Fraud by Software Vendor
As a result, in 2015 Indiana required that all software vendors
wishing to be certified to file Indiana returns sign agreements with
the state. The agreements made it clear to vendors that they would be
monitored for the fraud they sent along to Indiana. Software vendors
that experienced excessive fraud in 2014 were not certified unless they
provided evidence of increased fraud screening on their part. We
concluded that there is no reason to maintain a business relationship
with a vendor that is not playing their part in fraud prevention.
For the 2015 filing season, we have continued to make significant
enhancements to our identity theft and refund fraud program. We
continue to use the identity theft screening tool contracted with
LexisNexis with enhanced elements based upon lessons learned. In
addition, we have implemented a new pre-filter processing platform that
provides us the ability to run all of our individual returns through an
extensive screening prior to being processed in our normal returns
processing system. This pre-filter process includes a decision matrix
toolset which allows us to establish multiple filter parameters to
detect fraudulent returns and unusual activity. This provides
dramatically enhanced agility and adaptability during the filing season
as we experience various patterns or learn of new issues so that
processing rules and parameters can be easily adjusted. This pre-filter
platform was built with the assistance of Revenue Solutions, Inc.
(RSI), a third party vendor specializing in tax processing.
lessons learned
We are still early in battling this problem but the following early
lessons are apparent:
1. Strategic priority: identity theft and refund fraud have
escalated dramatically over the last two years and in order to
effectively combat the problem, it must be a strategic
priority. This demands making a fiscal investment in
leadership, staff, technology, and third party resources.
Priority support must be in place from the top down. Governor
Pence has consistently supported our efforts to combat identity
theft and refund fraud, which has been crucial in our ability
to continue to invest in and improve our program.
2. Collaboration: no one has all of the answers. The
perpetrators are sophisticated and agile, moving from one
vulnerability to the next. Sharing data, best practices, and
experiences among revenue agencies, both state and federal,
along with software vendors and support vendors is critical.
The Federation of Tax Administrators (FTA) has actively assumed
a key role as facilitator but must be strongly supported by all
parties involved.
3. Taxpayer Support: Taxpayers are willing to be part of the
solution if they understand what you're trying to achieve. We
received minimal resistance to the identity confirmation quiz.
However, communicating in advance that this is a valid tool and
not another scam is critical.
4. Targeted Solutions: There are many types of fraud,
fraudsters, and different means for filing returns. It is
important to understand the intricacies so that targeted
solutions can be developed and applied. We can no longer review
returns individually but must identify broad traits so that we
can systemically identify suspicious activity and address it
collectively. In the past, we treated all fraud the same which
is neither efficient nor necessary.
5. Prepaid Debit Cards: Use of prepaid debit cards is the
preferred tool of fraudsters in receiving their refunds. They
can be purchased with virtually no identification or
registration and are readily transferable from the card to gift
cards, bank accounts, other debit cards, or even to purchase
goods and services.
6. Fraudsters Hide: Sophisticated fraudsters use stolen or
invalid identities to open bank accounts, transfer money, and
further insulate themselves from the refund once it is
received. This makes it even more difficult to apprehend and
prosecute the culprits.
7. Manufactured Identity: A ``Manufactured Identity'' is one
where the fraudsters have simply filled out federal or state
returns with completely made up identities and tax data. They
may use celebrity names or obscure names with bogus addresses
and social security numbers and have the refund deposited to a
prepaid debit card that requires virtually no purchaser
identification. These are often being perpetrated by relatively
unsophisticated fraudsters and rely upon tax software vendors
that allow filing fees to be deducted from the refund itself
thus requiring no cash outlay in advance. Fortunately, our
LexisNexis identity confirmation tool is very effective at
identifying these fraudulent attempts as the identity
information does not match to valid external information.
8. Unlinked Return: An ``Unlinked Return'' is one that does
not have a federal tax return associated with it and is filed
directly with a state bypassing many of the IRS fraud
safeguards. This unlinked return process is also used by
fraudsters to file in multiple states rather than simply one
using the same fraudulent identity. Though it is possible to
have a valid unlinked return, the rate of fraud is very high
and requires additional review.
9. Synthetic Identity: A ``Synthetic Identity'' is one which
has been amalgamated from existing identity information such as
children or deceased relatives and contains enough valid
identity information to appear to be a valid identity.
10. Stolen Identity: A ``Stolen Identity'' is one where the
fraudsters have obtained valid taxpayer information comprised
of names, addresses, social security numbers, and sometimes
even dependents, from real taxpayers. These culprits then seek
to gain fraudulent refunds in two ways. First, they file a
federal return early in the filing season before the real
taxpayer submits their valid return. Second, they file directly
with a state, or multiple states, that is usually not where the
valid taxpayer is actually located.
the ultimate approach to combat this problem
In order to effectively overcome the problem of identity theft and
refund fraud, all parties involved must work collaboratively. We must
develop cross-functional teams with significant coordination among the
three key players in our tax system. Consider the Three Legged Stool
concept depicted in Figure 4 which notes that the states, the IRS, and
software vendors each represent an important leg of the stool. Each has
unique data, perspectives, and capabilities that the system as a whole
requires in order to make better decisions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The ``three legged stool'' concept allows each leg to execute
appropriate roles within our present tax system resulting in an
effective and collective solution.
Indiana believes that our partners at the IRS are in the best
position to centrally manage the highly sophisticated fraud. The IRS
can help the states define the expected behavior of the software
vendors which could include security requirements, potential fraud
reporting, and corrective behavior for vendorsnot operating according
to the systematic norm. The central location in this process also makes
the IRS a better place to accomplish analytics to identify multi-state
fraud patterns, manage a shared database, correlate with other data
sets (Social Security Administration and others), and coordinate
national and international enforcement efforts. Without data driven
prosecution and enforcement, the culprits face little risk in
continuing to conduct this sort of activity.
States must also work collaboratively with one another to develop
and share effective analytics, algorithms, and best practices. The
Federation of Tax Administrators (FTA) has convened a Fraud Working
Group comprised of multiple states, including Indiana, that have
already made a significant commitment to developing taxpayer
identification validation standards and consistent communication and
monitoring mechanisms to ensure that uniform data elements can be
captured and shared. Their intent is to establish uniform practical
measures that the software vendor industry can support and that will be
applied consistently, avoiding disparate rule sets and expectations
from each state. This will enhance the likelihood of industry
compliance. The FTA has also positioned itself as a facilitator and
clearinghouse for the states as well as the IRS in sharing best
practices and innovations. They can be very effective in helping
communicate with members the importance of identity theft and refund
fraud prevention programs and the positive economic impact it will
have. States must recognize this value and be willing to commit the
necessary resources.
Software vendors must be responsive to the IRS and states as they
learn more about the methods used by fraudsters. We have already
learned that account access must be protected with multi-factor
authentication. However, software vendors also have multiple other data
sources and analytics which they must be willing to use to stop fraud
from inception. Further, as their intelligence increases, they must be
willing to share that intelligence with states and the IRS as their
partners.
conclusion
In conclusion, I would like to emphasize the following points:
First, identity theft and refund fraud is an epidemic problem and
growing rapidly. It currently represents one of the easiest means
available for fraudsters to monetize stolen identity information. We
are all aware of the increased vulnerability we face for protection of
identity information.
Second, collaboration and information sharing among the IRS, state
departments of revenue, and tax processing and software vendors is
essential. Strengthening of the ``three legged stool'' by tax
processing partners will allow us to more effectively combat identity
theft and refund fraud through enhanced analytics, sharing of
information, and implementation of best practices. This sharing and
collaboration must be in real time, not days or weeks down the road.
Delays in digesting new information or implementing good ideas leaves
the window of vulnerability open longer for fraudsters to enter.
Third, investment in identity theft and refund fraud prevention
tools will provide a strong return on investment. In 2014, Indiana
realized greater than a 10 times return on investment based upon
fraudulent refunds stopped compared to actual program costs. I
encourage states as well as the federal government to make our battle
against identity theft and refund fraud a strategic priority. This also
means backing that priority with necessary funding to move the dial.
I'm confident it will provide a significant return on investment and
also protect our citizens.
On behalf of Governor Mike Pence and the citizens of Indiana, I
thank you for your time today. I appreciate the committee's willingness
to examine this issue and we in Indiana stand ready to assist and
participate in a comprehensive solution.
______
Prepared Statement of Timothy P. Camus, Deputy Inspector General for
Investigations, Treasury Inspector General for Tax Administration,
Department of the Treasury
Chairman Hatch, Ranking Member Wyden, and Members of the Committee,
thank you for the opportunity to testify on the topic of Tax Schemes
and Scams during the 2015 filing season.
I also want to thank you for holding a hearing on this topic, for
by doing so, you are bringing attention to these schemes and scams, and
thereby alerting your constituents and others across the country to
their existence. By raising public awareness about such efforts to
swindle people out of their money, we may prevent the next person from
becoming a victim. And if we protect even one taxpayer from this type
of theft, we have done a very good thing.
The Treasury Inspector General for Tax Administration, also known
as ``TIGTA,'' is statutorily mandated to provide independent audit and
investigative services necessary to protect the integrity of Federal
tax administration as well as to improve the economy, efficiency, and
effectiveness of Internal Revenue Service (IRS) operations. TIGTA's
role is critical in that we provide the American taxpayer with
assurance that the approximately 91,000 IRS employees, who collected
over $3.1 trillion in tax revenue, processed over 242 million tax
returns and other forms, and issued $374 billion in tax refunds during
Fiscal Year (FY) 2014, did so with the highest degree of integrity and
in an effective and efficient manner while minimizing the risks of
waste, fraud, or abuse. This includes investigating individuals who use
the IRS as a means of furthering fraudulent, criminal activity that
could call into question the integrity of the IRS, as well as
investigating allegations of serious misconduct by IRS employees and
investigating threats of violence against the IRS, its employees, and
facilities. Over the past year, a significant part of our workload has
been devoted to investigating scams that can negatively impact the
integrity of tax administration.
Tax scams are nothing new. For at least the last decade, the IRS
has provided the public with information about what it sees as the
``Dirty Dozen'' tax scams on its website. These scams range from
offshore tax avoidance to fake charities and inflated refund claims.
Compiled annually, the ``Dirty Dozen'' lists a variety of common scams
that taxpayers may encounter. However, many of these scams peak during
the filing season as people prepare their returns or utilize the
services of paid preparers.
The 2015 filing season has unfortunately brought more of the same.
However, there are two tax scams in particular that are among the most
pernicious and dangerous. They have proven to be surprisingly effective
and fast ways to steal taxpayers' money, and in this fast-paced
electronic environment, the money can be gone before the victims ever
realize they have been scammed.
phone impersonation scam
The phone impersonation scam has proven to be so large that it is
one of my agency's top priorities, and it has also landed at the top of
the IRS's ``Dirty Dozen'' tax scams this year. The number of complaints
we have received about this scam make it the largest, most pervasive
impersonation scam in the history of our agency. It has claimed
thousands of victims, including victims in every State represented on
this committee, with reported losses totaling more than $15.5 million
dollars to date. Here is how it works:
The intended victim receives an unsolicited telephone call from a
person claiming to be an IRS agent. The caller, using a fake name,
tells the victim their ``badge number,'' and claims that they owe taxes
and are criminally liable for an amount owed. The callers may even know
the last four digits of the victim's Social Security Number (SSN). They
then threaten the victim by stating that if they fail to pay the amount
immediately, the victim will be arrested, a suit will be filed, or some
other form of adverse official action will be taken. These actions have
been reported to include loss of a driver's license, deportation, or
loss of a business license. They often leave ``urgent'' callback
requests and call multiple times. Although these callers initially
preyed on the most vulnerable people, such as the elderly, newly
arrived immigrants and those whose first language is not English, they
have expanded their scam to people from every walk of life. The
continued number of people receiving these unsolicited calls from
individuals who fraudulently claim to represent the IRS is alarming.
We first started seeing concentrated reporting of these calls in
August, 2013. As the reporting continued through the fall, in October
2013, we started to specifically track this crime. To date, we have
received hundreds of thousands of complaints about these calls.
According to the victims, the scam artists made the threatening
statements as described above, and then demanded that the victims
immediately put money on prepaid debit cards in order to avoid being
immediately arrested. The callers often warned the victims that if they
hung up, local police would come to their homes to arrest them. The
scammer may also send bogus IRS e-mails to support their scam. Those
who fell for the scam withdrew thousands of dollars from their bank
accounts and then purchased the prepaid debit cards as instructed by
the callers. Once the prepaid debit cards were purchased, the criminals
instructed the victims to call them back and to read the numbers off of
the prepaid card. By the time the victims realized they had been
scammed, the criminals had negotiated the prepaid cards and the money
was long gone.
One particularly sad story was shared with TIGTA by a member of
this Committee in a letter written on behalf of a constituent regarding
the tragic death of the constituent's father as a result of receiving
several threatening calls from a scammer claiming to be from the IRS
and demanding money. This scam has cost thousands of taxpayers millions
of dollars, but to my knowledge, this may be the most heartbreaking
result. TIGTA continues to work with the IRS to strengthen its efforts
to crack down on this type of abuse and try to prevent other vulnerable
individuals from being victimized by this kind of fraud.
To date, TIGTA has received over 366,000 reports of these calls. We
receive between 9,000 and 12,000 reports of these calls each week. As
of March 9, 2015, 3,052 individuals have been victimized by this scam
by paying a total of $15.5 million, averaging over $5,000 per victim.
The highest reported loss by one individual was over $500,000. In
addition, 296 of these victims also provided sensitive identity
information to these scammers. The scam has claimed victims in almost
every State in the country. For example, taxpayers in Utah have lost
more than $276,000 to this scam, and taxpayers in Oregon have lost more
than $180,000. As of February 28, 2015, the top five States for total
dollar losses by victims are California ($3,840,000), New York
($1,352,732), Texas ($795,884), Florida ($760,000), and Virginia
($648,363).
The criminals do not discriminate; they are calling people
everywhere, of all income levels and backgrounds. In fact, I myself
received one of these calls on my home telephone on a Saturday, and you
may also have received a call or know of a family member or constituent
who has received one as well. Based on reviewing the complaints we have
received, we believe the calls are now being placed from more than one
source. This scam is the subject of an ongoing multi-agency
investigation. For this reason, there is much that we are doing to
apprehend the perpetrators, but I am not at liberty to disclose
specifically what is being done as it may impede our ability to
successfully bring these criminals to justice. I can tell you it is a
matter of high priority for law enforcement. As I told the individual
who called me on my home phone, ``your day will come.''
In the meantime, we are investigating some of the individuals who
process the money, and most recently we arrested two individuals
associated with this type of scam. The two individuals were arrested
and prosecuted for their role in converting the prepaid money cards.
When interviewed, one of the defendants estimated she had used prepaid
debit cards to purchase approximately $5,000 in money orders per day,
six days a week, since November 2013, or roughly $900,000 in money
order purchases between November 2013 and July 2014.\1\ In another
case, in March 2014, an individual was indicted for using an
impersonation scam. More specifically, he was indicted for extortion,
false impersonation, and fraud.\2\
---------------------------------------------------------------------------
\1\ S.D. Fla. Crim. Compl. filed Sept. 5, 2014.
\2\ S.D.N.Y. Indict. filed Mar. 6, 2014.
However, there is much more that needs to be done, as these three
examples are part of a broader ring of scam artists operating beyond
our borders. This is unfortunately similar to most of the cybercrime we
are seeing today--it is international in nature and committed using
technology, e.g., in the case of the phone fraud scam, the use of Voice
over Internet Protocol technology, and much of it originates from a
computer outside of the United States. To further deceive their
intended victims, by using this technology, the criminals create false
telephone numbers that show up on the victim's caller ID system. For
example, the criminals make it appear as though the calls are
---------------------------------------------------------------------------
originating from Washington, D.C., or elsewhere in the United States.
I am also concerned that these criminals and their copycats, like
the bank robbers of old, will go where the money is, and will keep
using this scam as long as people fall victim to it. For example, we
have noted an increasing number of recent reports that the calls are
coming in using robo-call technology. When the robo-calls are used, the
scammers leave messages demanding that the victim immediately call back
a telephone number and speak to a representative. Although the robo-
calls are a different approach, the outcome is the same: once the
criminal gets the victim on the phone, they demand immediate payment
and threaten the victim with arrest for failing to comply with their
demands.
Accordingly, we are reaching out aggressively by granting media
interviews with all the major networks, and issuing warnings and
multiple press releases to the media in conjunction with the IRS and
the Federal Trade Commission (FTC), as well as providing this testimony
to your Committee. Our message is simple: If someone calls unexpectedly
claiming to be from the IRS with aggressive threats if you do not pay
immediately, it is a scam artist calling. The IRS does not initiate
contact with taxpayers by telephone. If you do owe money to the IRS,
chances are you have already received some form of a notice or
correspondence from the IRS in your mailbox.
To recap, the IRS will never:
Call to demand immediate payment, nor will the IRS call about
taxes owed without first having mailed you a notice;
Demand that you pay taxes without giving you the opportunity to
question or appeal the amount they say you owe;
Require you to use a specific payment method for your taxes, such
as a prepaid debit card;
Ask for credit or debit card numbers over the phone; and
Threaten to bring in local police or other law enforcement groups
to have you arrested for not paying.
Remember, also, the IRS does not initially use e-mail, text
messages, or any social media to discuss your personal tax issue
involving taxes owed or refunds. For more information on reporting tax
scams, go to www.irs.gov and type ``scam'' in the search box. If you
have been targeted by this scam, report the incident to TIGTA at
www.tigta.gov by clicking on the IRS Impersonation Scam Reporting tab
in the upper right corner, or call the TIGTA hotline at 1-800-366-4484.
In addition, contact the FTC and use their ``FTC Complaint Assistant''
at www.ftc.gov. Please add ``IRS Telephone Scam'' to the comments of
your complaint. If you know you owe taxes or think you might owe, call
the IRS at 1-800-829-1040. They can help you with a payment issue.
lottery winnings
The lottery winnings scam we are seeing this filing season is a
continuation of an older scam. It starts with an e-mail or telephone
call stating that you have won the lottery and in order to collect the
winnings, you need to send money to prepay the tax to the IRS. The
lottery scam often, but not always, originates from outside of the
United States, and continues because it capitalizes on a very common
dream; getting rich quick and hitting the jackpot.
In one of the largest cases of this type, an individual and his co-
conspirators operated a scheme to defraud numerous individuals through
Internet solicitations, stealing more than $1 million as well as the
identities of the victims. The criminals obtained and used massive e-
mail distribution lists containing thousands of e-mail addresses to
send unsolicited e-mails falsely informing victims that they had won a
lottery or had inherited money from a distant relative. Follow-up e-
mails instructed the victims to provide personal and bank account
information to receive their lottery winnings or inheritance.
Subsequent e-mails to victims falsely indicated that a Government or a
quasi-governmental agency, such as the IRS or the United Nations, would
not pay the money due to them because advance payment of taxes and
other fees was required. The e-mails solicited the victims to wire
money to pay the taxes and other fees to designated bank accounts
controlled by the criminals.\3\
---------------------------------------------------------------------------
\3\ E.D.N.Y. Response to Defendant's Sentencing Letter filed Dec.
19, 2011 and E.D.N.Y. Superseding Info. Filed May 10, 2011.
However, if the victims were unable to pay the taxes and fees, the
criminals offered to loan them the money. The victims were then
convinced to open online bank accounts and provide the necessary login
information to the criminals. Using this information, the criminals
stole money from various other bank accounts, transferred that stolen
money to the victims' accounts, and then instructed the victims to wire
the money to foreign bank accounts controlled by the criminals. In the
end, the victims never received any lottery winnings, inheritance, or
other money in connection with the scheme; however, they may have
received much grief for unknowingly being placed in the middle of a
---------------------------------------------------------------------------
money laundering scheme.
The lead defendant was sentenced to a total of 30 months of
imprisonment and five years of supervised release for Aggravated
Identity Theft and Conspiracy to Commit Wire Fraud. He was also ordered
to pay $1,741,822 restitution to his victims and a $200 assessment.\4\
---------------------------------------------------------------------------
\4\ E.D.N.Y. Judgment filed Dec. 27, 2011.
OTHER FRAUDS IMPACTING TAX ADMINISTRATION
identity theft
The IRS continues to make improvements in its identification of
identity theft tax returns at the time the returns are processed and
before fraudulent tax refunds are released. The IRS has described
identity theft as one of its ``Dirty Dozen'' and recognizes that new
identity theft patterns are constantly evolving and, as such, it needs
to adapt its detection and prevention processes.
Notwithstanding improvements in its detection efforts, the IRS
still does not have timely access to third-party income and withholding
information. Most of the third-party income and withholding information
is not received by the IRS until well after taxpayers begin filing
their tax returns. For example, the deadline for filing most third
party information returns with the IRS is March 31, yet taxpayers began
filing their tax returns for the 2015 Filing Season on January 20th. As
of February 27, 2015, the IRS has received approximately 58.5 million
individual tax returns. Legislation would be needed to accelerate the
filing of the information returns.
The IRS has taken steps to more effectively prevent the filing of
identity theft tax returns by locking the tax accounts of deceased
individuals to prevent others from filing a tax return using their name
and SSN. The IRS has locked approximately 26.3 million taxpayer
accounts between January 2011 and December 31, 2014. These locks
prevent fraudulent tax returns from entering the tax processing system.
For Processing Year 2014,\5\ the IRS rejected 338,807 e-filed tax
returns and stopped 15,915 paper-filed tax returns through the use of
these locks as of September 30, 2014.
---------------------------------------------------------------------------
\5\ A processing year is the calendar year in which tax returns are
processed by the Internal Revenue Service.
Additionally, the IRS continues to take steps to more effectively
detect and prevent the issuance of fraudulent refunds resulting from
identity theft tax return filings. The IRS continues to expand identity
theft filters to identify fraudulent tax returns at the time they are
processed. It has expanded the number of identity theft filters used to
identify potentially fraudulent tax returns and prevent the issuance of
fraudulent tax refunds from 114 filters during Processing Year 2014 to
196 filters during Processing Year 2015. The identity theft filters
incorporate criteria based on characteristics of confirmed identity
---------------------------------------------------------------------------
theft tax returns.
Tax returns identified by these filters are held during processing
until the IRS can verify the taxpayer's identity. As of January 31,
2015, just 11 days after the filing season began, the IRS reported that
it identified and confirmed 264 fraudulent tax returns and prevented
the issuance of more than $2 million in fraudulent tax refunds as a
result of the identity theft filters.
In addition to the above actions, the IRS developed and implemented
a clustering filter in response to TIGTA's continued identification of
large volumes of undetected potentially fraudulent tax returns with tax
refunds issued to the same address or deposited into the same bank
account. The clustering filter tool groups tax returns based on
characteristics that include the address, zip code, and/or bank routing
numbers. Using this tool, the IRS reports that as of October 9, 2014,
it identified 517,316 tax returns and prevented the issuance of
approximately $3.1 billion in fraudulent tax refunds.
prisoner fraud
Refund fraud associated with prisoner SSNs remains a significant
problem for tax administration. The number of fraudulent tax returns
filed using a prisoner's SSN that were identified by the IRS increased
from more than 37,000 tax returns in Calendar Year 2007 to more than
137,000 tax returns in Calendar Year 2012. The refunds claimed on these
tax returns increased from $166 million to $1 billion. As of February
28, 2015, the IRS reports that it identified 24,011 potentially
fraudulent tax returns filed by prisoners for screening.
In September 2014, TIGTA reported that the IRS has not yet shared
fraudulent prisoner tax returns and return information with Federal or
State prison officials.\6\ As of June 2014, the IRS has yet to complete
needed agreements to begin sharing information related to false
prisoner tax returns and return information with Federal and State
prison officials. This is despite the fact that the IRS was initially
given the authority to share certain information with Federal prison
officials in
October 2008. The authority for the IRS to share information with
prison officials is intended to enable prison officials to take action
to punish prisoners for perpetrating fraud and to help stop this abuse
of our tax system.
---------------------------------------------------------------------------
\6\ TIGTA, Ref. No. 2014-40-091, Prisoner Tax Refund Fraud: Delays
Continue in Completing Agreements to Share Information With Prisons and
Reports to Congress Are Not Timely or Complete (Sept. 2014).
TIGTA also found that the required annual prisoner fraud reports to
Congress are not timely and that the reports do not address the extent
to which prisoners may be filing fraudulent tax returns using a
different individual's SSN. In addition, we followed up on a condition
identified in a past review and found that IRS processes still do not
ensure that all tax returns filed using a prisoner SSN are assigned a
prisoner indicator. Our analysis of tax returns filed during Calendar
Year 2013 identified 43,030 tax returns that were filed using a
prisoner SSN that were not assigned a prisoner indicator. When tax
returns filed using a prisoner SSN are not assigned the required
indicator, the tax return will not be subjected to the IRS's
specialized prisoner fraud checks.
unscrupulous tax preparers
Tax preparers who steal a client's identity information or their
tax refunds can also cause great harm to the integrity of the Federal
tax system. The following case highlights an example of this damage.
Last December, an Ohio accountant was sentenced for wire fraud,
engaging in monetary transactions in property derived from specified
unlawful activity, mail fraud, and attempting to interfere with
administration of the internal revenue laws. The accountant was
sentenced to 36 months in prison, followed by three years of supervised
release, and was further ordered to pay $987,050.00 in restitution to
victims.\7\ From approximately 2009 through 2013, the accountant
engaged in various schemes to defraud individuals to obtain money and
property by means of false and fraudulent pretenses and
representations, and to obstruct the due administration of the Internal
Revenue laws.\8\
---------------------------------------------------------------------------
\7\ E.D. Pa. Judg. filed Dec. 16, 2014.
\8\ E.D. Pa. Indict. filed Jan. 9, 2014; E.D. Pa. Info. filed June
3, 2014.
After the IRS issued a levy to a financial firm in the amount of
$91,193.53 to collect taxes owed by one of his clients, the accountant
transmitted, via e-mail, a falsified IRS Form 668-D, Release of Levy,
which purported to remove the levy from the couple's account. The
accountant did so knowing the IRS had not authorized the release of the
levy from that account.\9\
---------------------------------------------------------------------------
\9\ Id.
Prior to this, around April 2011, the accountant devised a scheme
to defraud another victim, a senior citizen with little experience
managing financial matters. The accountant falsely represented to the
victim that the victim owed the IRS a substantial amount of taxes, and
directed the victim to send him multiple payments for taxes purportedly
owed by the victim. The accountant kept all of the money received from
the victim and used it for his own personal and business expenses,
defrauding the victim of approximately $237,050.\10\
---------------------------------------------------------------------------
\10\ E.D. Pa. Info. filed June 3, 2014.
In a different case, a tax preparer used the means of
identification of other people to file false income tax returns and
obtain refunds from the IRS. The preparer obtained most of the means of
identification from his previous employment as a tax preparer and from
other employment positions he held. He provided this information to co-
conspirators so they could also file false income tax returns and
obtain refunds from the IRS. The preparer and his co-conspirators
ultimately defrauded or attempted to defraud the IRS out of at least
$560,000 in tax refunds.\11\
---------------------------------------------------------------------------
\11\ S.D. Cal. Superseding Indict. filed June 19, 2012.
---------------------------------------------------------------------------
phishing scams
Phishing is a scam that has been around for several years and is
typically carried out through the use of unsolicited e-mails or a fake
website that poses as a legitimate site in order to lure potential
victims in to either pay some sort of fee, or provide valuable personal
and financial information. Armed with this information, a criminal can
commit identity theft or financial theft. Phishing is often used as the
technique to gather information to start other scams, such as the
lottery scam identified earlier.
My investigators are alerted to hundreds of new phishing scams
every year. For example, my agents can encounter numerous fake e-mails
that lead to fraudulent websites appearing to be legitimate, but
actually looking to steal taxpayers' personal information or to trick
the victim into paying money. Also by clicking on any of the links in
these e-mails or websites, innocent taxpayers have unknowingly invited
the criminal into their computer where they can steal financial
information, personal contact information, and even file more
fraudulent documents. All the while, this activity is unknown to the
victim.
The best thing taxpayers can do is to be alert and to stop and
think before clicking on any link. The first contact a taxpayer
receives from the IRS will not be made via e-mail. If they receive an
unsolicited e-mail that appears to be from either the IRS or an
organization closely linked to it, they should be leery and call the
IRS to verify the contact and report it by sending it to
[email protected].
TIGTA and the IRS office of Online Fraud Detection and Prevention
work closely together to protect innocent taxpayers from criminals who
create fake websites that impersonate the IRS. In fact, since 2012,
when the number of identified phishing sites peaked at almost 19,000,
we have seen a reduction in the number of identified phishing sites
over the past two years to 1,200 in 2014.
Chairman Hatch, Ranking Member Wyden, thank you for the opportunity
to share my views. This concludes my testimony on some of the tax
schemes and scams we have noted during the 2015 filing season. Much
work is being done on multiple fronts to dismantle many of these
schemes and scams, and our hope is that if we return to testify next
year, these incidents will be greatly reduced or eliminated.
______
Prepared Statement of Caroline Ciraolo, Acting Assistant Attorney
General, Tax Division, U.S. Department of Justice
Chairman Hatch, Ranking Member Wyden, and Members of the Committee,
thank you for the opportunity to appear before you this morning to
discuss the
Department of Justice's efforts to combat tax refund fraud arising from
identity theft.
The Department greatly appreciates the commitment that the
Chairman, the Members of the Committee, and the staff have made to
highlighting and addressing this important issue. Combatting the
illegal use of social security numbers and other personal information
to file false returns seeking fraudulent refunds is a top priority of
both the Tax Division and the United States Attorneys' Offices across
the country. Your efforts to bring attention to this growing and
insidious crime will help educate taxpayers about the importance of
detecting and reporting identity theft and tax fraud. Today's hearing
also sends a strong message to those who would commit these crimes that
their schemes will be detected and that they will be prosecuted to the
fullest extent of the law.
Using a variety of civil and criminal enforcement tools, the
Division, with the assistance of our partners at the IRS and in the
United States Attorneys' Offices, has successfully enjoined hundreds of
unscrupulous return preparers and other individuals who viewed the
Federal Treasury as a personal bank account. Their schemes have
included filing returns containing inflated, false deductions or false
W-2 income statements, or preparing returns and failing to remit the
refund to the taxpayer. In recent years, an even more aggressive scheme
has spread across the country at an alarming rate--stolen identity
refund fraud (``SIRF'').
The plan is frighteningly simple--steal social security numbers,
file tax returns showing a false refund claim, and then have the
refunds electronically deposited or sent to an address where the
offender can access the refund checks. In many cases, the taxpayer
whose social security number has been compromised will later face
difficulties when he or she files a tax return after the IRS received a
false return using that taxpayer's social security number. In other
cases, the false returns are filed using social security numbers of
deceased taxpayers or others from whom no federal tax return may be due
for filing. These schemes are usually implemented in early January,
before the proper taxpayer is expected to file their returns, with the
goal of taking advantage of the IRS's efforts to pay out refunds
quickly. In many cases, the most vulnerable in our society are the
victims of this form of identity theft. Names and social security
numbers have been stolen at medical firms, prisons, and hospitals by
dishonest employees who are often paid for the information. Postal
workers have been robbed, and in one instance, murdered to gain access
to refund checks.
The high potential for financial gain and low physical risk have
made stolen identity refund fraud the new crime of choice for drug
dealers and gangs. The scope and organization of these criminals is
vast and growing, and in certain cases, the criminal proceeds of the
crime have been used to purchase illegal narcotics for resale.
For taxpayers who are direct SIRF victims, the economic and
personal consequences can be severe and often long-term. While the IRS
has invested substantial efforts and resources to address identity
theft concerns, those victimized face months, if not years, of
overwhelming paperwork, credit problems, and inconvenience. When a
stolen identity is used to commit tax refund fraud, all taxpayers are
victims, and all Americans are impacted by the loss to the Federal
Treasury. In recognition of the severity of the problem, the Department
and the IRS have devoted significant resources to the successful
prosecution of individuals engaged in stolen identity refund fraud.
Individuals engaged in this criminal conduct face a variety of charges,
including aggravated identity theft, theft of government property,
false claims for refund, false returns, and tax conspiracy.
In the last several years, the Department has successfully
prosecuted and received significant sentences in cases in which a
stolen identity was used to commit tax refund fraud. For example:
In October 2013, in Alabama, a U.S. postal employee was
sentenced to 111 months in prison for his role in a stolen
identity refund scheme. The mail carrier used mailing addresses
on his postal route to send debit cards loaded with false
refunds. Other defendants obtained the stolen identities used
on the returns from the Alabama Department of Corrections. The
defendants filed hundreds of fraudulent tax returns that
claimed over $1 million in false refunds.
In May 2014, a superseding indictment was returned against
nine defendants for their roles in a $20 million dollar stolen
identity refund conspiracy. According to the allegations in the
indictment, between 2011 and 2013, the defendants ran a large-
scale identity theft ring in which they filed over 7,000 tax
returns claiming false refunds. As part the scheme, one of the
defendants stole identities from the hospital at Fort Benning,
Georgia where she worked and had access to the identification
data of military personnel, including soldiers who were
deployed to Iraq and Afghanistan. Other defendants stole
identities from an Alabama state agency and from the Alabama
Department of Corrections.
In June 2014, a Miami, Florida man was sentenced to 10
years in prison for stealing identities and then filing false
returns that requested over $13 million in false refunds by
fraudulently claiming gambling income and withholding from the
Florida Lottery Commission. His co-conspirator opened
approximately eighteen bank accounts to deposit these
fraudulent refunds.
In December 2014, a Tennessee woman was sentenced to 102
months in prison. She and her co-conspirators unlawfully
obtained personal identifying information of victims, including
high school students, and used the information to file false
tax returns claiming millions of dollars of refunds. Two co-
conspirators have been sentenced to 45 and 48 months in prison,
respectively, and three others have pled guilty and await
sentencing.
In January 2015, a Maryland woman and former bank employee,
was sentenced to 87 months in prison for her role in a massive
and sophisticated identity theft and tax fraud network
involving more than 130 individuals. She is among approximately
a dozen people who have pleaded guilty in the U.S. District
Court for the District of Columbia to charges in one of the
largest prosecutions to date involving the use of stolen
identifying information. The overall case involves the filing
of at least 12,000 fraudulent federal income tax returns that
sought refunds of at least $40 million.
As these examples illustrate, SIRF crimes are different from the
crimes typically addressed by the Tax Division. While the typical
criminal tax case may involve willfully filed false returns, evading
the assessment of tax due and owing or the use of sophisticated
financial schemes which invariably require lengthy in-depth
investigations, SIRF crimes generally involve garden variety theft and
fraud. Moreover, SIRF prosecutions are often reactive to exigent
circumstances; in many cases, the crime is discovered by local law
enforcement officers who come upon a large cache of Treasury checks or
debit cards loaded with fraudulent tax refunds.
Recognizing these fast-moving law enforcement needs, on October 1,
2012, the Tax Division issued Directive 144, which delegates to local
United States Attorneys' Offices the authority to initiate tax-related
grand jury investigations in SIRF matters, to charge those involved in
SIRF crimes by complaint, and to obtain seizure warrants for forfeiture
of criminally-derived proceeds arising from SIRF crimes, without prior
authorization from the Tax Division. The Tax Division retains authority
in connection with forfeitures if any legitimate taxpayer refunds are
involved.
Directive 144 was the result of collaborative efforts among the Tax
Division, the IRS, and the United States Attorneys' Offices to
strengthen the law enforcement response to SIRF crimes. The Tax
Division continues to work closely with the IRS and United States
Attorneys' Offices across the country to ensure effective information
sharing and investigative cooperation as permitted by law. And this
approach is yielding significant results. Beginning with the
implementation of Directive 144 (and the expedited review procedures)
and ending December 31, 2014, the Tax Division has authorized more than
975 SIRF investigations involving more than 1,700 subjects. As a
result, during the same period the Tax Division and the U.S. Attorneys'
Offices have brought more than 725 prosecutions involving more than
1,400 individuals.
The prosecution of SIRF crimes is a national priority, and,
together with our law enforcement partners, we will continue to look
for the most effective ways to bring this conduct to an end and to
punish these wrongdoers. Indeed, enforcement efforts are critical, but
the goal is to stop fraudulent refunds at the door. In the meantime,
the Tax Division will continue to prosecute these cases and, in doing
so, send a clear message to those who engage in this conduct that they
will be held accountable for their actions.
Thank you for the opportunity to provide the Department's
perspective on this issue, and I look forward to answering any
questions that you may have.
______
Prepared Statement of Hon. Orrin G. Hatch,
a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
today delivered the following opening statement at a committee hearing
on tax schemes and scams:
The committee will come to order.
The committee meets today to hear about growing criminal activity
that is targeting taxpayers across the country. These criminal acts are
perpetrated by thieves hiding behind telephone lines and computers,
preying on honest taxpayers and robbing the Treasury of tens of
billions of dollars every year.
This must stop, and we are here today to hear from some of the
federal and state officials on the front lines of the fight to catch
these crooks and protect taxpayers.
But first I want to talk about one case in particular, and one very
large number. In this town--and especially right here on this
committee--we often talk in hundreds of millions, billions, or even
trillions of dollars. Some joke about a number being referred to as
budget dust, even if the number has nine or ten zeros behind it.
But let me tell you about a number that is truly stunning: $15,800.
That's $15,800 saved through hard work, sacrifice, and honest
living.
That's $15,800 saved for the down payment of a new house for a
growing family.
And, that's $15,800 in savings that was wiped away by criminals who
use fear, confusion, and intimidation as their weapons.
This is the story of the Degen family from Taylorsville, Utah, and
I would like to play a news clip from KTVX, a Utah ABC affiliate, that
tells their story.
This is just one family, out of millions that have been targeted
and thousands that have been victimized. And this is just one scam.
But, make no mistake, taxpayers across the country are also facing
identity theft in record numbers, account takeovers, and other criminal
attacks.
Once again, this must be stopped.
Taxpayers must be more aware of the risks and better protected from
attack. And these criminals must be found and brought to justice. I
look forward to the testimony from our witnesses on today's panel and
to hearing more about how we can accomplish these goals.I'll now turn
it over to Senator Wyden for his opening statement.
______
Prepared Statement of Ellen M. Klem, Director of Consumer Outreach and
Education, Office of the Attorney General, Oregon Department of Justice
Good morning. I'd like to begin by thanking Chairman Hatch, Ranking
member Senator Ron Wyden and members of the Committee for allowing me
the opportunity to testify today. My name is Ellen Klem and I am the
Director of Consumer Outreach and Education for Oregon Attorney General
Ellen Rosenblum. My job is to travel the state educating Oregonians on
how to be savvy consumers and avoid being scammed by scammers and
fraudsters.
Every week, I'm in a different city talking to a different group of
Oregonians. For example, last week I was on the northern Oregon coast
in Astoria, Oregon with Attorney General Rosenblum talking to a group
of older Oregonians at the Clatsop Retirement Village, and next week I
will be in Albany, Oregon talking to a group of retired teachers.
Every day, I hear stories from our most vulnerable citizens about a
wide variety of scams and frauds. To an unassuming Oregonian, these
scams can be threatening, and quite frankly, scary. While fraudulent
behavior, imposter phone calls and unofficial mail solicitations have
always been a part of a scammer's repertoire, today's scammers use new
tactics.
Lately, my conversations with Oregonians have focused almost
exclusively on the IRS imposter scam. This is a major headache for too
many Oregonians. Looking to take advantage of people during a busy tax
season, these scammers tell victims over the phone that they owe money
to the IRS or Oregon Department of Revenue. The caller demands that the
person pay the money immediately through a temporary debit card or a
wire transfer. If the victim refuses to pay, they are threatened with
arrest, deportation or suspension of a business or driver's license. In
many cases, the caller becomes aggressive and insulting. For a
vulnerable Oregonian, this phone call can be devastating.
In 2014, the IRS imposter scam topped Oregon's list of consumer
complaints. Last year, 1,340 Oregonians filed complaints with the
Oregon Attorney General about this scam, nearly double the complaints
as the next highest category. Victims of this scam reported losses
totaling $77,137.09. Unfortunately, we know this is just the tip of the
iceberg. Many scam victims do not even report their losses because they
either don't know whom to report to or are too ashamed that they have
been scammed. For countless others, they may not even know they have
been scammed.
That is why I am here today; to bring you the voices of Oregonians
who have lost money, time and a sense of security because of these
scammers. In particular, I would like to tell you the stories of two of
those victims and share what the Oregon Attorney General is doing to
prevent this from happening to others.
The first story I would like to share is that of a victim I'll
refer to as Diane. Last year she fell victim to the IRS imposter scam
to the tune of $15,000, the largest loss reported to the Oregon
Department of Justice in 2014. Diane, a woman in her late 50s, lives
and works in Turner, Oregon, a small town with fewer than 2,000
residents. On August 12, 2014 she received a message on her answering
machine from a man claiming to be from the IRS and directing her to
call him back at a Washington, D.C. phone number. She dutifully called
him back and the person who answered her call proceeded to read her an
affidavit for her arrest, threatened her with a fine of $25,000 and 18
months in prison, and told her she would be arrested later that day if
she did not pay. Needless to say Diane was terrified. She feared for
her job and her financial future, and begged for forgiveness. The
scammer told her it was possible to settle the matter, but only if she
paid $15,000 immediately by purchasing a pre-paid debit card at a local
store. Hoping to avoid prison, and afraid of further consequences,
Diane made the only choice she thought she had; she complied with the
request--and she was out $15,000.
Individuals like Diane who send money to the scammers aren't the
only victims of imposter scams. In September 2014, I was contacted by
Marissa Phillips, a small business owner outside of Portland, Oregon
whose employee, Linda, had fallen victim to an imposter scam. After
sending a small amount of money to the scammers, Linda realized her
mistake and stopped answering the phone. But the scammers refused to
give up. They kept calling. And, when it was clear that she wasn't
answering the phone, the scammers began calling Marissa's small
business; a business that provides in-home services for seniors and
persons with disabilities. When Marissa called me, she reported that
the scammers had called her business at a rate of 100 phone calls per
minute for 20 minutes; that's 2,000 phone calls in less than half an
hour. All the calls from scammers prevented the small business from
providing help to those that actually needed it. The seniors, their
families, hospitals, doctors and other staff could get nothing more
than a busy tone when they called for assistance. Ultimately, the
business was forced to change its phone number, and all of its
marketing materials, incurring a significant cost.
While this scam can seem daunting, thankfully not everyone in
Oregon who receives a phone call from an IRS imposter will fall victim
to the scam. I'd like to think that's because we have been working so
hard to educate all Oregonians, especially our most vulnerable.
The Oregon Attorney General has several educational tools aimed at
scam prevention, because she and I both know that well-informed
Oregonians are more likely to recognize fraud and less likely to become
victims. We also know these scams can be hard to track and prosecute.
Because education is so critical, we have a number of resources
available for consumers, including:
A brochure with ten tips to protect you and your family from
scams,
A toll-free complaint hotline that is staffed 5 days a week
with some of the most knowledgeable volunteers in the state,
An easy to remember website--www.oregonconsumer.gov,
A searchable online consumer complaint database called Be
InfORmed, and
Scam Alerts sent via email, our website, and Twitter.
But our educational efforts do not stop there. We also have an
entire section of the Oregon Department of Justice devoted to financial
fraud and consumer protection.
The 34 employees of the Consumer Protection & Financial Fraud
section received 50,000 phone calls in 2014 alone and receives nearly
8,000 written consumer complaints every year. Last year alone, this
section opened more than 80 formal investigations and, at any given
time, they are working on 220 open investigations.
That is why we have also invested in strong partnerships with
federal, state, and local government entities and officials, tribes,
community organizations, advocacy groups, and members of the media.
Through these partnerships we're able to share complaints, coordinate
investigations, and disseminate information to the public. Our partners
give us a bigger voice to share information and keep Oregonians safe.
In fact, one of our most successful partnerships is the Social
Services Fraud Working Group, which meets monthly. The work group--in
existence since 2011--is multidisciplinary and comprised of more than
30 federal, state, and local agencies working fraud cases in the field
of social services. At each meeting, members of the work group share
tips and work collaboratively to fight social services fraud. The
success of the work group has spawned two additional workgroups, one in
Alaska and another in Washington state.
Unfortunately, Oregon is not unique in the number of reported
scams. IRS imposter scam complaints are up nationally. Scammers target
everyone, but especially older adults and other vulnerable individuals;
they will not stop until they are caught and brought to justice.
Unfortunately, that proves to be a challenge.
We look forward to continuing our collaboration with the IRS, the
FTC, and other federal agencies like the Office of the Inspector
General of the Social Security Administration that hosts our Social
Services Fraud Work Group.
This concludes my testimony. Again, thank you Chairman Hatch,
Ranking member Senator Ron Wyden and members of the Committee for
inviting me today. I am available to answer questions.
______
Prepared Statement of Hon. John L. Valentine, Chairman,
Utah State Tax Commission
Mr. Chairman and esteemed members of the Senate Finance Committee,
I come before you this morning to discuss and recommend actions that
can be taken to reduce the contagion of tax fraud which is sweeping the
country.
There are four issues for your consideration this morning:
1. Strengthen information sharing between the IRS and the States.
2. Stricter regulation of the financial industry as it relates to
``pre-paid'' debit cards.
3. Prohibit the practice of applying refunds to payment of fees for
filing services, a practice sometimes called ``Refund
Transfer.''
4. Require third party filing services to tighten front end security
by using multi-factor authentication and other measures to
secure data from unauthorized disclosure and identity theft.
Prior to the commencement of the 2015 filing season, Utah installed
a state of the art computer software system to identify potentially
fraudulent returns. On January 20 of this year, the Utah Tax Commission
opened filing of income tax returns and deployed this system. As we
began to process returns, our system started sending out verification
letters to taxpayers whose returns appeared suspicious. Within ten days
of the opening of the filing season, we began receiving calls from
taxpayers who had received our communication about their return; they
had not yet filed their returns.
We initially thought these were isolated incidents, but they were
not. As that week progressed, our software identified more and more
suspicious returns. We found several factors that were the same in all
the suspicious returns:
All the suspicious returns had the direct deposit information
changed from the previous year's bank account to prepaid debit
cards, often Green Dot brand debit cards.
All the suspicious returns contained routing and account numbers
that differed between the federal return and the state return.
Most of the suspicious returns appeared to have the exact 2013 tax
return data populated to the fraudulent 2014 return.
The address on the suspicious returns was the same as the address
on the 2013 return.
Since most of these filings were being made through the Turbo Tax
system, it appeared that something in their process was
compromised.
After communicating with the owners of Turbo Tax, (Intuit), and
notifying other states through our national organization, we notified
the Internal Revenue Service of the possible compromise of the
Modernized Electronic Filing (MEF) systems. The accounts in question
were immediately sent to the IRS for review. On February 10, 2015, we
sent 31 returns to the Ogden IRS Service Center that we had verified by
contact with the taxpayers as being fraudulent. As of the date of this
testimony, the IRS has not contacted us with the results of any
determinations on their part of the nature of the returns. They did
inform us in a phone conversation that they had known about a filing
scheme which took a previous year's return and copied it into a current
year's filing. The IRS representative stated that they had known about
this scheme since last year, but had not notified the states of this
fact.
Many have asked what action was undertaken by the state of Utah
when it discovered this attack. In short, we hurried.
We stopped all refunds until we could analyze the magnitude of the
problem.
During the first week, we identified five different repeating
fraud schemes.
We identified the returns with specific characteristics that were
potentially fraudulent.
We deployed our identity quiz system and commenced sending ``ID
verification letters'' on the returns that met the unique
characteristics of potential fraud.
If the taxpayer failed the quiz, they were instructed to send us
certain documentation to verify their identity, that included:
Two forms of identification such as SSA card, passport,
drivers license, state ID card, government issued photo ID,
utility bill, bank statement, payroll stub, college transcript
or insurance policy, and
One picture ID.
If the taxpayer does not respond to the quiz or fails to provide
the needed information, the system will reverse the return as
though it had not been filed.
To the extent we could identify them, refund deposit requests to
pre-paid debit cards have been converted to a paper warrant
(check) and sent to the taxpayer's address.
As we continue to prevent the outflow of fraudulent refunds, we
found great difficulty in determining the nature of financial
institution routing and account information. We specifically found that
there was no uniformity in numbering to distinguish traditional
checking accounts and savings accounts from prepaid debit cards. For
example, a prepaid reloadable debit card sold by Green Dot, appears to
be linked to a bank account even though the debit card had no actual
checking or savings account associated with it. (These cards may even
appear as a Visa or Master Card.) Quoting from their card holder's
agreement: ``Your card is a prepaid debit Visa or MasterCard card,
which means that you must add funds or `load' your card in order to use
it. There is no credit line associated with your Card.'' Once the funds
are transferred to such cards, they cannot easily be traced or
recovered, a perfect vehicle to commit fraud. A simple fix would be to
require a different series, letter or additional numbers to distinguish
these cards from cards connected to bank or credit union checking and
savings accounts.\1\
---------------------------------------------------------------------------
\1\ An ABA routing transit number is a nine digit code which
identifies the financial institution on which it was drawn. It was
originally used to facilitate sorting, bundling, and shipment of paper
checks back to the drawer's (check writer's) account. As new payment
methods were developed (ACH and Wire), the system was expanded to
accommodate these payment methods.
To obtain a Green Dot re-loadable prepaid Visa or MasterCard debit
card, a customer is required to provide their name, address, date of
birth, Social Security number, phone number, and other information that
will allow Green Dot to identify customers.\2\ If a Green Dot customer
is pretending to be someone else by assuming that person's identity,
then the identity thief has successfully obtained a fraudulent method
to gain access to resources or other benefits in that person's name
without the use of a traditional bank account. Perpetrators then use
these fraudulently obtained pre-paid debit cards to make thousands of
dollars' worth of retail purchases, quickly cash them out or drain them
at an ATM. Prepaid debit cards appear to be preferable to fraudsters
because the identity thief doesn't have to bother with banks, credit
unions or check-cashing stores that may become suspicious when one
person starts bringing in multiple tax refund checks to be cashed or
deposited.
---------------------------------------------------------------------------
\2\ Green Dot maintains that it is compliant with Federal money
laundering laws and with all Patriot Act elements.
While we progressed though the investigation, we found a practice
that enables fraudsters to perpetrate fraud without having anything at
risk, a practice called ``refund transfers.'' Here is how it works: The
fraudster is allowed to deduct the third party filing fees from the
refund. The third party filing service gets paid, the fraudster
receives the refund and the state and federal government (and
potentially the taxpayer who may actually be entitled to a refund) are
---------------------------------------------------------------------------
out the funds.
Finally, we found third party filing services often lack the front
end security measures necessary to protect their users in this cyber
world. At a minimum, these services should install multi-factor
authentication to assure that a person filing a tax return is indeed
the person identified on the return. Quality fire walls and other data
protections are a given, but since we are uncertain at this time of how
the prior return information was obtained, it is a careful company,
concerned about their product and its customers, that will invest the
funds necessary to protect their data from cyber thieves.
Unfortunately, prepaid debit cards cannot be specifically
identified by routing numbers or bank account numbers using the present
standardized methods. A standardization of routing or account numbers
to include identification of prepaid debit cards would facilitate
evaluation of suspicious filers and enhance the ability of Federal and
State taxing authorities to deny refunds to the fraudsters and catch
fraudulently filed income tax returns.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
Since the day the IRS opened its doors, scam artists have been
hatching up slick new ways of stealing taxpayer dollars from the
Treasury. What's new is, they're now stealing Americans' identities and
personally threatening them on an industrial scale, while directly
robbing them of their hard-earned money. The fraudsters dream up new
tactics and milk them for all they're worth before they start getting
caught. Then it's lather, rinse, repeat. Onto the next scam, always one
step ahead of the law.
Today the committee will closely examine several of the fraudsters'
latest strategies that are plaguing taxpayers. The one that's hitting
my home state of Oregon hardest is the fake phone call demanding money
or personal information on behalf of the IRS. In fact, these calls were
the number one consumer complaint registered with the Oregon Department
of Justice last year. Not everybody knows the IRS simply does not cold-
call people making demands or threats. So it's pretty clear from my
vantage point that there's a lot more work to be done taking on this
scourge.
Given the sophistication of this criminal activity and the fact
that a lot of it comes from overseas, this sure looks to me like an
emerging type of organized crime. So the real question is, what's it
going to take to root it out and put the bad actors on the sidelines?
How about more prosecutions, stronger deterrents, or more cops on the
beat? And what's the best way of getting the word out so that taxpayers
aren't tricked into surrendering their life savings to some
intimidating voice on the other end of the phone line?
But even if people manage to avoid the phone calls, you can bet the
crooks are finding other ways to profit. Tax preparation software has
become the scammer's new fast lane. These sharks manage to acquire a
taxpayers' personal data from the black market or hack into commercial
databases, and they file false returns electronically. The victims may
not find out until much later in tax season, and by then it's too late.
Already there have been thousands of reports like this in 2015. As
we'll hear today, some software vendors aren't doing enough to help
prevent fraud.
In my view, part of the challenge is getting states, Internet tax
services, and the IRS on the same wavelength. Everybody's got to
communicate and work together to make sure criminals can't just nimbly
slide from one jurisdiction to the next, as they rip off more
unsuspecting Americans.
Taxpayers may choose to avoid software, but not even a paid tax
preparer is guaranteed to be safe. In fact, many of them don't have to
meet any standards for competence. There are far too many con artists
out there willing and able to prey on the people who come through their
doors. In some egregious cases, they secretly falsify their victims'
returns to boost the refunds, and they pocket the difference. And once
tax season ends, the crooks disappear from the storefronts they
occupied, leaving no trace of where they've gone.
A few states, including Oregon, have rules in place to help shield
taxpayers from this kind of scam. But most states don't. Senator Cardin
and I introduced the Taxpayer Protection and Preparer Proficiency Act
at the beginning of this Congress to give all Americans the security
they deserve. Our colleague Senator Nelson is also a leader on this
issue of keeping taxpayers safe from identity theft and fraud. And I'm
sure they share my desire to take on these challenges on a bipartisan
basis.
There is no end to the ingenuity of tax scam artists. My hope this
morning is that we'll get more fresh ideas for catching up to this wave
of fraud and stopping it. That can't come soon enough. So I'm looking
forward to talking with our witness panel here today, which I'm very
happy to say includes Ms. Ellen Klem, the director of consumer outreach
and education in the Oregon Attorney General's office. Thank you, Ms.
Klem and all our witnesses, for being here during a time of year that's
busy for all of you.
______
Communication
----------
Letter Submitted for the Record by Operation HOPE
March 11, 2015
Honorable Mike Crapo
Chairman
Senate Subcommittee on Taxation and IRS Oversight
219 Dirksen Senate Office Building
Washington, D.C. 20510
Honorable Robert P. Casey, Jr.
Ranking Member
Senate Subcommittee on Taxation and IRS Oversight
219 Dirksen Senate Office Building
Washington, D.C. 20510
Dear Chairman Mike Crapo and Ranking Member Robert Casey:
Operation HOPE is dedicated to financial empowerment for everyone in
American society, and believes deeply that the expansion of the middle
class depends on financial literacy and financial opportunity for lower
income people so they can improve their lives and their futures. This
year marks the 9th year for the advocation of IRS Earned Income Tax
Credit Awareness (EITC) by Operation HOPE. Since 2006, we have worked
to promote the EITC Program and there are many challenges we face to
achieve this, but among them is the potential for an additional burden
that efforts to combat tax fraud may have on the most vulnerable
citizens.
Cyber fraud attacks on financial systems in the United States are a
major threat for our government and our institutions. But these also
represent a major threat to people. The human side of financial and tax
fraud is deeply concerning, not only in terms of innocent people being
victimized by fraudsters, but also by being inadvertently caught up in
government battle tactics as the war against fraud is waged.
The IRS Taxpayer Advocate has written in multiple Annual Reports to
Congress about innocent taxpayers being victims, both coming and going,
in the story of tax fraud. She specifically addressed the problems of
law-abiding individuals and families whose tax refunds have been held
up or frozen by Government, suffering hardship and unnecessary
financial crisis. She also warns of innocent citizens having their
returns incorrectly flagged for investigation as the result of
imprecise or overly sensitive anti-fraud filters and screens. Her
reports should serve as a warning to carefully consider tactics as we
consider how to go about ridding our tax system of fraud.
There is much recent talk about imposing requirements or encouraging
the tax industry to help Government by identifying and flagging suspect
returns, and Government increasing its fraud defenses to stop
suspicious returns, freeze refunds, and investigate filers. While
effective strategies for fighting fraud do require private sector
cooperation with Government, there are also inherent risks to our
citizens from a tax system dominated by fear of fraud and not balanced
by concern for rights. It will not be a successful strategy for private
industry to voluntarily or by government order act like deputized U.S.
Marshalls, effectively making ``citizen's arrests.'' Doing so places
businesses in the position of improperly investigating and reporting
their customers to the IRS--essentially extending the policing powers
of the government directly into the private sector.
Those working to escape poverty, as well as the underserved and the
struggling middle class, deserve better than to be profiled, whether
economically or by the circumstances of their lives. Those pulling
themselves up the bottom rungs of the economic ladder should not be
treated as a suspect class, targeted for either greater tax compliance
burdens than the rest of the population, or flagged as a targeted
population for tax examination and investigation. Claiming the Earned
Income Tax Credit should not mark the citizen for suspicion, nor for
imposition of heavier compliance burdens and costs.
In the tax context, this means we cannot embed an assumption in our
voluntary compliance tax system that taxpayers should be treated as if
they are guilty until proven innocent.
We know your Subcommittee will appropriately review the threat of tax
fraud not only in the context of the security of our tax system, but in
the necessity to avoid collateral damage to innocent people, swept up
in broad and imprecise identification for investigative and enforcement
activity based solely on computer algorithms.
We urge the Subcommittee to diligently examine and question both public
and private strategies to satisfy itself that we stay true to our
values as we combat wrongdoing. The tax industry needs rational
regulations and standards on how this fight should be fought, and
Government needs active oversight and accountability to ensure fairness
and decency. Congress needs, through its Oversight, to ensure that we
are not losing our values as we work to combat wrongdoing.
We stand ready to assist and support the Subcommittee in any way that
might be helpful in your pursuit of these critical concerns on behalf
of honest taxpayers, who represent the overwhelming majority of the tax
a in public in this country.
All the best and . . .
With HOPE,
John Hope Bryant
Founder, Chairman and Chief Executive Officer
www.operationhope.org
[all]