The IRS uses certain “filters” to detect and prevent tax refund fraud. While these filters do stop a substantial amount of fraud, they also flag hundreds of thousands of returns each year that turn out to be legitimate. This causes refund delays and often creates financial hardships. Notably, the filters have produced a dramatic increase in the number of taxpayers seeking TAS assistance. TAS’s non-identity theft refund fraud case receipts have increased nearly five-fold over the past three years – from about 18,500 cases in calendar year (CY) 2017 to about 92,000 in CY 2019. Moreover, about 72 percent of the case receipts for CY 2019 were accepted under TAS’s “economic hardship” criteria. I wrote about this issue in a Most Serious Problem in my 2019 Annual Report to Congress.
Some background: The IRS’s Return Integrity Verification Operations (RIVO) function operates filters designed to identify suspected identity theft and other non-identify theft related instances of fraud. One of these filters is designed to identify cases where a taxpayer files a fraudulent return in his or her own name (e.g., the taxpayer claims his employer withheld $7,000 in federal tax when the employer only withheld $3,000, which, if not detected, would cause the taxpayer to receive a refund of $4,000 more than the correct amount). This non-identity theft filter is operated, in IRS parlance, by the “Pre-Refund Wage Verification Hold” (PRWVH) program.