Senators take aim at digital tax fraud

The Senate Finance Committee on Wednesday plans to mark up legislation aimed at battling taxpayer identity theft and electronic tax fraud.

The move comes on the heels of a computer breach at the IRS that compromised the sensitive information of more than 300,000 taxpayers. More broadly, digital tax fraud has skyrocketed over the last year, spurred by the rash of data breaches across the private sector.

{mosads}Committee leaders Sens. Orrin Hatch (R-Utah) and Ron Wyden (D-Ore.) are supporting the measure, which would enhance taxpayer notifications regarding identity theft, push employers to file tax forms earlier and improve the electronic tax filing system to speed processing and uncover more fraud.

The bill would also strengthen the punishments for taxpayer identity theft.

“We need to do a better job of protecting taxpayers,” said Wyden, the Finance Committee’s ranking member, after the IRS acknowledged in August that its breach was more than twice as large as the agency initially reported.

The latest tax-filing season was plagued by record levels of tax fraud. Nearly half of U.S. states reported spikes in electronic filing fraud. Minnesota even stopped accepting some electronic returns because of the soaring levels of fraud.

Intuit, maker of the popular tax filing software TurboTax, also decided to briefly suspend services after identifying a dramatic rise in stolen personal information being used to claim tax refunds.

The Senate Finance Committee launched an investigation into the issue earlier this year, vowing to produce legislation that would help mitigate the problem.

The IRS compromise, first revealed in May, only put more pressure on the committee to come up with a solution.

Policymakers and experts believe that forcing companies to file tax forms earlier and creating a secure online portal for submitting documents can help thwart some of the rampant cyber tax fraud.

Identity theft specialists say fraudsters rely on filing fake tax forms early, while businesses are still preparing important employee forms like the W-2 and 1099.

If enacted, the Hatch-Wyden bill would move up these filing deadlines, while also establishing an electronic submission portal for the forms that would help ease the filing process and help the IRS better detect fraud.