Why the IRS should push Tax Day to June 15

It’s time for Congress to revamp the outdated refund process and thwart identity theft, fraud

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The only way to stop tax refund fraud is to change the way the tax fil­ing and refund sys­tem works, and while this may be a painful process for employ­ers and tax­pay­ers alike, it’s necessary.

 The prob­lem with data 

Adam Levin, chairman and co-founder of Credit.com and IDT911
Adam Levin, chair­man and co-founder of Credit.com and IDT911

Unless you’ve been hid­ing out in the Unabomber Suite at the Loon Lake Lodge, you know that data-relat­ed crimes are legion, but what you may not know is that data-relat­ed tax fraud specif­i­cal­ly is increas­ing geo­met­ri­cal­ly. It is a prob­lem scream­ing out for a solution.

The moth­er of these crimes is the, by now, all-too-famil­iar data breach—what I like to call the third cer­tain­ty in life. We know for sure that way more than a bil­lion records are “out there” as a result of data breach­es. That’s a ginor­mous amount of infor­ma­tion, and it can be used to com­mit a panoply of crimes—one of the more lucra­tive among them being tax refund fraud.

Tax refund fraud loss­es are esti­mat­ed to reach $21 bil­lion by this year, accord­ing to the Trea­sury Inspec­tor Gen­er­al for Tax Admin­is­tra­tion, which pro­vides inde­pen­dent over­sight of the Inter­nal Rev­enue Ser­vice. It is an astound­ing fig­ure, greater than the gross domes­tic prod­uct of many small nations.

The fact that you have not yet become the vic­tim of tax­pay­er iden­ti­ty theft may have more to do with dumb luck than your efforts to stay safe. For while there are moun­tains of records out there, there are only so many crim­i­nals avail­able to use them for this or that iden­ti­ty-relat­ed crime. It may not be tax fraud, but at some point the bad guys are going to get you. (If you do have rea­son to believe your per­son­al infor­ma­tion was com­pro­mised, you should mon­i­tor your cred­it for signs of oth­er iden­ti­ty theft. You can do so by pulling your cred­it reports for free each year at AnnualCreditReport.com and view­ing your cred­it scores for free each month on Credit.com.)

The prob­lem with April 15

In 2012, the IRS received more than 148 mil­lion tax returns. The agency issued almost $310 bil­lion in refunds to approx­i­mate­ly 110.5 mil­lion tax­pay­ers. That is a whole lot to keep track of, a fact that is not lost on iden­ti­ty thieves. Accord­ing to a report from the Gov­ern­ment Account­abil­i­ty Office, by March 1, 2012, the IRS already had paid out around half of that year’s tax refunds. That is a month and a half before the April 15 fil­ing deadline.

If you were a crim­i­nal, you would see that time­line as an irre­sistible opportunity.

As Decem­ber fades into Jan­u­ary, and you start prepar­ing your tax­es, employ­ers also get to work on fil­ing your W-2 with the gov­ern­ment. The feds then com­pare your tax return to the W-2 your employ­er files to make sure every­thing match­es up. But here’s the catch: Employ­ers don’t have to file W-2 wage data until March 2, if they file on paper, and March 31 for e-filers.

And that’s the per­plex­ing part: Half of the refunds in 2012 were sent out on blind faith. As things stand now, the IRS only starts the process of match­ing employ­er-report­ed W-2 data to tax returns in July, long after most refunds have been issued. It’s called “look-back” compliance.

Does that sound a tad crazy to you? If you answered in the affir­ma­tive, you might just be sane (at least with regard to this issue). While jus­tice is blind, and we like it that way, that’s the only part of gov­ern­ment where lack of vision is a virtue, and it’s high time the IRS should con­sid­er get­ting new glasses.

To be fair, part of the rea­son for the slow com­pli­ance check is that W-2s have to go through the Social Secu­ri­ty Admin­is­tra­tion before being sent over to the IRS. Why it’s done this way is anyone’s guess, but it doesn’t mat­ter. Until it is changed, tax refund fraud is only going to get worse and worse and worse, which is the fun­da­men­tal prob­lem with April 15, March 2 and March 31, both reflex­ive­ly and respectively.

Giv­en that prob­lem set, a sim­ple (and nec­es­sary) change applied to the flow of infor­ma­tion is not going to solve the prob­lem by itself. The IRS uses look-back com­pli­ance for an impor­tant rea­son: to get mon­ey back to tax­pay­ers as soon as pos­si­ble. Many tax­pay­ers rely on refunds to make ends meet, and as a result the IRS is under enor­mous con­gres­sion­al pres­sure to issue refunds prompt­ly. In fact, the agency is required by law to pay inter­est if it takes longer than 45 days after the tax return’s due date (typ­i­cal­ly April 15) to issue a refund.

It is by dint of this sys­tem that most tax­pay­ers can expect a refund with­in 21 days of fil­ing their tax return, and that is an excel­lent thing. Unfor­tu­nate­ly, for those who become vic­tims of tax-relat­ed fraud and refund diver­sion, it may take more than 300 days to actu­al­ly get their mon­ey back.

The prob­lem with look-back compliance

That said, the refund process is a quaint rel­ic of sim­pler times. It’s the epit­o­me of an ana­log approach devoured in our dig­i­tal real­i­ty, and because of this, look-back com­pli­ance should go the way of the main­frame computer.

There is no sim­ple solu­tion that can make this hap­pen overnight. The GAO’s sug­ges­tion of ear­li­er W-2 fil­ing dead­lines might allow the IRS to match employ­er-report­ed wage infor­ma­tion to tax­pay­ers’ returns before issu­ing refunds. The rec­om­men­da­tion in the report was to move up the employ­ers’ dead­line from March 31 to Jan. 31. This could be facil­i­tat­ed by requir­ing all employ­ers to e-file W-2s, instead of the cur­rent arrange­ment, in which only com­pa­nies with more than 250 employ­ees have to e-file. Paper fil­ing costs more, and it takes longer, which exac­er­bates the prob­lem. It was prob­a­bly time to insti­tute manda­to­ry W-2 e-fil­ing a decade ago, but bet­ter late than never.

Of course, these issues are for those “guardians” in Con­gress to fig­ure out, but one thing is certain—something has to change.

More on income tax:

Full dis­clo­sure: IDT911 spon­sors Third­Cer­tain­ty. This sto­ry orig­i­nat­ed as an Op/Ed con­tri­bu­tion to Credit.com and does not nec­es­sar­i­ly rep­re­sent the views of the com­pa­ny or its partners.

Adam Levin is chair­man and co-founder of Credit.com and IDT911. His expe­ri­ence as for­mer direc­tor of the New Jer­sey Divi­sion of Con­sumer Affairs gives him unique insight into con­sumer pri­va­cy, leg­is­la­tion and finan­cial advo­ca­cy. He is a nation­al­ly rec­og­nized expert on iden­ti­ty theft and credit.