The spike in fraudulent returns can be attributed to a few main factors, namely more electronic filing, higher dollar amounts of refundable credits and a growing number of people using debit cards to receive refunds. These electronic facilities make it more difficult to detect tax fraud. In many cases, integral to these tax fraud cases is identity theft where the fraudster uses the Social Security number of a victim (who may even be deceased) to claim a tax refund. Thus far this year, the IRS has reported more than 450,000 identity theft cases.
One major source of identity information is the Social Security’s publicly available Master Death File, a database of deceased individuals that includes personally identifying information like full names, Social Security numbers and addresses. The office of the National Taxpayer Advocate has recommended that the Social Security department restrict access to this information.
One consequence of the increased incidences of tax fraud is an ever-increasing backlog of tax cases. The IRS is unable to effectively cope with the workload of tax cases while battling tax fraud. The National Taxpayer Advocate report to Congress revealed that, “The IRS is experiencing unprecedented backlogs in return processing because of identity theft and other refund fraud, is instituting 'hard freezes' on questionable returns because it cannot timely address them and is unable to answer anywhere from an average of about 30 percent [of calls] overall in fiscal year 2012 to a low of 65 percent of calls [for one customer service department].”
What is worse is that along with the fraudulent cases being put on hold, the IRS also delayed legitimate tax refund cases. The ones who suffer are often the victims of identity theft as the IRS puts both the legitimate and suspected fraudulent case in abeyance while it investigates the issue. As a result, legitimate taxpayers seeking their refunds had to spend "many months" going back and forth with the IRS before getting their money.
The situation was so bad that during this year’s tax season, the IRS was only able to answer an average of one out of nine phone calls made to it offices. And when you do get through, the average wait to talk to an IRS representative was one hour.