From the U.S. Government Accountability Office, www.gao.gov Transcript for: Preventing Tax Refund Fraud Description: The IRS estimates that would-be thieves used false identities to try to steal $14.5 billion in tax refunds in 2015. What's being done to thwart them? Related GAO Work: GAO-18-20: Identity Theft: Improved Collaboration Could Increase Success of IRS Initiatives to Prevent Refund Fraud Released: November 2017 [ Background Music ] [ Jessica Lucas Judy: ] This is something the IRS really can't address by itself. It needs to work together with others. [ Jacques Arsenault: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. I'm Jacques Arsenault. The Internal Revenue Service estimates that would-be thieves use false identities to try to steal $14.5 billion in tax refunds in the 2015 tax year. I sat down with Jessica Lucas Judy, a director in our Strategic Issues team, to talk about GAO's new report on the efforts to prevent refund fraud. An issue that has been on GAO's high risk list since 2015. First, I asked Jessica how successful have these been at collecting someone else's tax refund? [ Jessica Lucas Judy: ] Identity theft refund fraud is a pretty major problem. You know, it occurs when a fraudster steals a Social Security number or address or other personally identifiable information and uses it to file a false return trying to get a refund. Of that $14.5 billion that was attempted in 2015, IRS estimates it paid out about at least $2.2 billion in fraudulent refunds. [ Jacques Arsenault: ] So it sounds like they caught a lot but there's a lot that made it through as well. What are some of the latest steps that IRS is taking to stop these fraudsters? [ Jessica Lucas Judy: ] IRS is attacking this problem on a number of different fronts. They have done a lot of research to better understand the nature and the extent of the problem. They've also developed tools to help them authenticate taxpayers to make sure that the taxpayer is who they say they are and also to better detect potentially fraudulent returns. Then in 2015, they convened a security summit with state revenue agencies and financial institutions and other partners such as tax software providers and tax preparers to help figure out ways to work together to address identity theft refund fraud. There were a number of different initiatives that came out of that security summit. Our report looked at two of them in particular. The first one was the rapid response team and that's basically just what it sounds like. That's a way for IRS and states and industry to work together to respond quickly to a suspected incident. And then the second one that we looked at is called an ISAC, an information sharing and analysis center. ISACs have been used in other sectors as a way for the public sector and the private sector to work together to address some kind of security issue. So IRS' ISAC or identity theft refund fraud really builds on that model. [ Jacques Arsenault: ] So it sounds like these collaboration and information sharing models, like they've been using a lot of things. Can you talk about why they are specifically important or a good potential tool in terms of refund fraud? [ Jessica Lucas Judy: ] So for this kind of problem, this is something the IRS really can't address by itself. It needs to work together with others who are involved in the process of getting tax returns and processing tax returns and paying refunds. One of the ways that ISACs help is that they help with sharing information safely and securely so that members can understand what are some of the known schemes. It gives them tips and tools for identifying potentially fraudulent information or suspicious activity. Also gives them tools for analyzing trends. And one of the things that's really key for an ISAC is to have what's called a trusted third party. In this case, it's a contractor that helps facilitate all of that information sharing. As you can imagine, there's a lot of sensitivity around dealing with taxpayer information and data and identifying vulnerabilities and fraud. And so having that trusted third party to facilitate the whole thing really is very important. [ Jacques Arsenault: ] Do we have a sense of how well these efforts are going? [ Jessica Lucas Judy: ] The ISAC pilot started up in 2017 and as of November, it had 48 members. So it's grown pretty quickly. Some of the members that we spoke to such as states, they said that as a result of the ISAC trust seems to be improving among the partners, that IRS officials have become more accessible to them, and that they're getting information from IRS faster. So it has had a number of successes. [ Background Music ] [ Jacques Arsenault: ] Given that a rapid response is important in combating this kind of theft, I asked Jessica to explain her team's recommendations to agencies in this report. [ Jessica Lucas Judy: ] We have two recommendations that we're making. The first is that the ISAC pilot better align with five leading practices for pilot design. So we compared the ISAC pilot with five leading practices that GAO had identified for having a successful pilot. And we found that they had incorporated elements of each of those five practices but hadn't addressed any of them fully. The second recommendation that we made is that they develop an outreach plan to expand their membership. As I said, they had 48 members. So they've grown quite a bit but some of the states that we spoke with didn't know about the tools. Some of the tools that were provided through the ISAC or really understand what those benefits of joining the ISAC might be. We also felt that that could do more to include financial institutions in the ISAC and incorporate those who are outside of the security summit. [ Jacques Arsenault: ] So finally, what would you say is the bottom line of this report? [ Jessica Lucas Judy: ] Overall, it's really commendable how well IRS is working with its state and industry partners to help address the serious problem of identity theft refund fraud. We think that implementing our recommendations would help them take this effort to the next level and better allow the ISAC and the partners to be able to protect billions of taxpayer dollars. [ Background Music ] [ Jacques Arsenault: ] Thanks for listening to the Watchdog Report. To hear more podcasts, subscribe to us on Apple Podcasts. [ Background Music ] [ Jacques Arsenault: ] For more from the congressional watchdog, the U.S. Government Accountability Office, visit us at GAO.gov.