Tax filing changes could help fight refund fraud: IRS

Patrick Temple-West for Reuters writes Changes to the tax filing process may be needed to fight tax-refund fraud, the top tax collector told a congressional panel on Tuesday, a day after the federal tax filing deadline.

In steps that could lead to slower processing of tax refunds, Internal Revenue Service Acting Commissioner Steven Miller said a delay in the start of the tax filing season could help fight refund fraud.

So might getting taxpayer information more rapidly from employers, he told the tax-law writing Senate Finance Committee.

Such changes would "not necessarily" mean later issuance of refunds, "but that's part of the discussion," he told Reuters after the hearing.

Refund fraud, which has exploded in recent years, typically involves using stolen names and Social Security numbers to file phony electronic tax forms and refund claims.

Perpetrators then pocket the refund checks that follow, costing the Treasury billions of dollars a year, according to government estimates.

The IRS tries to process and distribute refunds quickly, often within days. This works against fraud prevention because the agency does not always corroborate filing information with third parties, such as employers, before issuing a refund.

Taxpayers can begin filing tax returns in January. Refunds often get distributed by the IRS before it gets corroborating information, which sometimes does not arrive at the agency from employers until after the tax-filing season is over.

Tax professionals have said that corroboration would help fight refund fraud, but such double-checking takes time.

One change to the filing process might be to wait until the end of the tax season before issuing refunds. But that could require the IRS to pay interest on refunds, according to a Joint Committee on Taxation report.

Earlier this month, senators introduced legislation to combat the use of taxpayer data in tax-refund fraud scams. Similar legislation has been introduced in the House of Representatives.

Separately, the IRS recently lost a federal court case over its effort to regulate thousands of unlicensed tax-return preparers. The IRS has appealed the court ruling.

Senate Finance Committee Chairman Max Baucus, a Democrat from Montana, said the court ruling was "a major setback" for the IRS.

He said he may consider legislation specifically to grant the IRS authority to regulate tax-return preparers.