From the U.S. Government Accountability Office, www.gao.gov Transcript for: Identity Theft Tax Refund Fraud Description: Audio interview by GAO staff with Jay McTigue, Director, Strategic Issues Related GAO Work: GAO-16-508: Identity Theft and Tax Fraud: IRS Needs to Update Its Risk Assessment for the Taxpayer Protection Program Released: June 2016 [ Background Music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. It's June 2016. Identity theft tax refund fraud is a big problem. Fraudsters use stolen identities to file taxes in someone else's name, then collect tax refunds and disappear. The IRS estimates that in 2014 it prevented or recovered more than $22 billion in fraudulent refunds, but that it also paid more than $3 billion in successful attempts. A team led by Jay McTigue, a director in GAO's Strategic Issues team, recently reviewed IRS's efforts to combat identity theft refund fraud. Jacques Arsenault sat down with Jay to talk about what they found. [ Jacques Arsenault: ] For starters, can you explain what identity theft tax refund fraud is? [ Jay McTigue: ] Sure, identity theft refund fraud occurs when a criminal obtains your personal information such as your name, your social security number, your address and uses that information to file a tax return with the IRS. The goal of which is to get a refund from the Treasury. This hurts taxpayers because when they go to file their own return, the IRS will tell them, "Hey, wait. Somebody has already filed a return." You know, "Who are you?" And this results in the taxpayer having to spend more time dealing with the IRS. The IRS has to take additional steps to authenticate the taxpayer. It takes time and, you know, if the taxpayer is expecting a refund, it will delay that refund. [ Jacques Arsenault: ] It's easy to see how this can impact taxpayers both in time and certainly a lot of heartache and extra documents and going back and forth with the IRS to say, "Yes, I am who I say I am and I don't know who this other person was." Can you talk about how big of an issue is this for U.S. taxpayers? Because these are U.S. tax dollars that are going out the door to these fraudsters. [ Jay McTigue: ] Absolutely. To its credit, IRS in the -- in fiscal year 2014, estimated that it stopped about 22 1/2 billion dollars in attempted identity theft refund fraud. The bad news; however, is they also estimate that about 3 billion was paid out to criminals. [ Jacques Arsenault: ] And that 3 billion may not be telling the whole story; right? [ Jay McTigue: ] That's absolutely right. 3 billion is based on known identity theft cases or tax returns and the issue is that the nature of identity theft refund fraud is continually changing. Fraudsters are becoming ever more clever in coming up with different schemes, exploiting the latest technology, exploiting weaknesses in IRS's systems, you know, so there's a little uncertainty as to whether or not the 3.1 billion is a precise number. But it certainly is the best estimate out there right now. [ Jacques Arsenault: ] Okay, so let's shift gears a little bit. What is IRS doing to protect against this kind of fraud -- either to prevent it before it happens or, or to catch it while it's going on? [ Jay McTigue: ] Absolutely. IRS has multiple layers of defense for this type of crime starting with before a taxpayer files its return through various computerized programs that it runs on tax returns that it's processing and also working with third parties -- financial institutions after a refund has been paid out that helps detect suspicious activity once the refund has left IRS. And as returns are processed, various filters flag or detect suspicious cases. These cases or tax returns are then put through a program called "the taxpayer protection program" which subjects the -- those returns to additional scrutiny -- additional authentication. Basically IRS reaches out to the taxpayer and provides some with various ways to authenticate their identity. [ Jacques Arsenault: ] So looking at the taxpayer protection program, I know you found some limitations in how that authentication works. Can you talk about that? [ Jay McTigue: ] What IRS has relied on or the method to authenticate taxpayers that IRS has relied upon is basically asking the taxpayer questions that only that individual should know. However, this type of personal information is becoming more readily available to criminals -- either online or through the various breaches of commercial and government databases that we read about almost daily. [ Jacques Arsenault: ] It seems like if a criminal could get my name and social security number and address, then it's not going to take that many extra steps for them to get, you know, my mother's maiden name or, you know, what was my first pet or high school mascot or things along those lines. It seems like that's -- that's a lot easier to find. [ Jay McTigue: ] That's exactly right. [ Jacques Arsenault: ] So then, finally, what would you say is the bottom line of this report? [ Jay McTigue: ] The bottom line of this report is simple. Identity theft refund fraud continues to be a major threat to the IRS as well as the U.S. Treasury. $3.1 billion is a large sum of money and IRS needs to stay vigilant in terms of authentication methods and combating this -- this threat. [ Background Music ] [ Narrator: ] To learn more, visit GAO.gov and be sure to tune in to the next episode of GAO's Watchdog Report for more from the congressional watchdog, the U.S. Government Accountability Office.