Tax-identity theft exploded to more than 1.1 million cases in 2011 from 51,700 in 2008. The Treasury Inspector General for Tax Administration last summer reported discovering an additional 1.5 million potentially fraudulent 2011 tax refunds totaling in excess of $5.2 billion.
Why has identity theft rocketed through the IRS? Because American taxpayers, urged on by the IRS, have taken to filing their income-tax returns electronically and arranging for refunds to be directly deposited into bank accounts. E-filing is appealing because it provides an electronic postmark confirmation that the return was filed on time. When it is combined with direct deposit, a refund can arrive in as little as seven days. In 2012, 80% of individual returns were e-filed, fulfilling an initial goal Congress set in 1998. The result is an automated system in which the labor burden is transferred to the taxpayer.
Fraudulent tax returns can come in the form of tax-identity theft, refund fraud, or return-preparer fraud and are difficult to prosecute. With e-filing, evidence of fraud is difficult to find. There are no signed tax forms, envelopes or fingerprints, and e-filing promises quick refunds. …
The national taxpayer advocate has recommended that taxpayers be allowed to tell the IRS to accept their return only when filed on paper, thus preventing e-file tax-identity theft. So far the IRS has failed to allow this. Less effective methods are to request an “electronic filing PIN,” available at www.irs.gov, and file Form 14039, “Identity Theft Affidavit,” so that the IRS might apply additional return-screening procedures. Sadly, conventional credit-monitoring services are useless against income-tax identity theft.
In sum, e-filing helps the IRS with audit selection, costs the Treasury billions through fraud, and transfers many costs of tax administration to you.