Beware of ID thieves: They may steal your tax refund and more

MIAMI — Without a hitch, Miami natives Ed and Kelley Brill had filed their joint income-tax returns from the same home address for 14 years.

But this year, after obtaining an extension, the Miami Shores, Fla., couple were shocked to learn that the Internal Revenue Service had rejected their electronically filed return. It turned out that a thief had stolen Kelley's identity, Social Security number and employer's name, then filed a falsified refund claim — beating the Brills to the punch.

Now, the parents of three school-age children — who still have no idea how they were victimized — must wait six to 12 months to get their $7,918 refund. Like hundreds of thousands of other Americans, the Brills are enduring a frustrating triple whammy: ID theft, tax fraud and IRS red tape.

"What gets me is the taxpayer who was ripped off and did nothing wrong has to prove himself to the IRS," said Ed Brill, 50, a mortgage banker whose wife is a schoolteacher.

They learned from an IRS representative in November that Kelley's ID was stolen and used for the fraudulent tax refund, but were told little else. "The IRS never bothered verifying anything filed by the crook who committed the crime," said Brill. "I want to be afforded the same courtesy and efficiency that the crook was afforded by the IRS."

The combustible issues of identity theft and tax fraud in the electronic age have forced the IRS to come up with smarter ways to detect phony refund claims, match employee-employer wage statements and handle victims' refund problems.

IRS Commissioner Douglas Shulman has focused not only on the viral identity-theft problem, but also on potential solutions such as "real-time" matching of W-2 income statements before tax refunds are issued. The agency has recently begun a series of public meetings with consumer groups, accountants, employers and others.

Here's the crux of the challenge: Scammers are exploiting a weakness in the IRS electronic filing system, because the agency does not match filers' tax returns to W-2 income forms filed by employers until months after the filing season ends in April.

That means the IRS is not scrutinizing fabricated documents before it issues refunds to thieves — refunds that are loaded onto debit cards that can be used in retail stores, supermarkets and banks.

But fixing the costly problem will require the IRS to modernize its processing system and set new rules mandating that employers file workers' income statements earlier in the year.

Jose Marrero, a former IRS special agent in charge of the agency's South Florida criminal division, said part of the problem is that Congress has pressured the agency to process returns faster, so taxpayers can receive their refunds more quickly.

But that has meant the IRS has less time to review claims for accuracy.

"There is a real conflict that the IRS has to deal with," said Marrero, a partner with MRW Consulting Group in Fort Lauderdale, Fla. "They are hamstrung by some of the things that Congress wants them to do or allows them to do."

In the meantime, the IRS has designed software filters to flag false returns before they are processed and refunds issued — including screens that spot certain changes in a taxpayer's filing, such as a different address or marital status.

The agency warns that despite improvements, it is "also unfortunately seeing an increase in identity theft, including more complex schemes."

According to a Government Accountability Office report, the number of identity theft-related fraud incidents on tax returns reached 248,000 last year, about five times the number in 2008.

Ed Brill pressed an IRS representative for immediate resolution of his case. Instead, he was told if he did not hear back from the IRS by phone or writing within 90 days, he should contact the agency again. That clock started ticking on Nov. 7, when the IRS received the couple's theft affidavit, he said.

"I just don't want to be penalized for a hole in their system," he said. "And their attitude was, 'Get in line with the rest of them.' "

"Like any family in this economy, it represents three months' worth of bills — mortgages, car payments, food, children's clothing," Brill said.

"The IRS has to understand that when they make a mistake like this, they cause a family like ours a lot of hardship."

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