The IRS uses certain “filters” to detect and prevent tax refund fraud. While these filters do stop a substantial amount of fraud, they also flag hundreds of thousands of returns each year that turn out to be legitimate. This causes refund delays and often creates financial hardships. Notably, the filters have produced a dramatic increase in the number of taxpayers seeking TAS assistance. TAS’s non-identity theft refund fraud case receipts have increased nearly five-fold over the past three years – from about 18,500 cases in calendar year (CY) 2017 to about 92,000 in CY 2019. Moreover, about 72 percent of the case receipts for CY 2019 were accepted under TAS’s “economic hardship” criteria. I wrote about this issue in a Most Serious Problem in my 2019 Annual Report to Congress.

Some background: The IRS’s Return Integrity Verification Operations (RIVO) function operates filters designed to identify suspected identity theft and other non-identify theft related instances of fraud. One of these filters is designed to identify cases where a taxpayer files a fraudulent return in his or her own name (e.g., the taxpayer claims his employer withheld $7,000 in federal tax when the employer only withheld $3,000, which, if not detected, would cause the taxpayer to receive a refund of $4,000 more than the correct amount). This non-identity theft filter is operated, in IRS parlance, by the “Pre-Refund Wage Verification Hold” (PRWVH) program.

Before paying refunds, the IRS generally tries to match the income and withholding amounts the taxpayer lists on his or her tax return against the amounts reported by the taxpayer’s employer(s) on Forms W 2 and by other payors of income on Forms 1099. The results generated by this data-matching – often because of missing W-2 data or a mistake on the part of the taxpayer – have driven the sharp increase in TAS cases and undermined our ability to be as responsive as we would like in handling taxpayer cases.

To improve our effectiveness and responsiveness, TAS has sought to develop policies for filing season (FS) 2020 that will enable us to (i) accept the cases of taxpayers who have the greatest need for TAS assistance and (ii) defer accepting cases where TAS assistance is not likely to be helpful and normal IRS processes will resolve the case in relatively short order. To do that, we met with officials from RIVO to better understand their plans, and we conducted an analysis of FS 2019 PRWVH cases to better understand the underlying problems and determine how we can best advocate for taxpayers who need our help. As a result of our review, TAS has implemented the following changes for this filing season.

1. We will generally wait four weeks before accepting PRWVH cases. This year, we plan to give the IRS’s systemic data matching process time to work before we accept PRWVH cases in TAS. We are doing this because the IRS’s systemic processes commonly release refunds even before TAS can begin requesting a release. TAS will wait four weeks from the date that RIVO selects a return into the PRWVH program. Following this four-week period, we will accept PRWVH inquiries meeting our case acceptance criteria.
2. We will advise taxpayers to file amended returns in appropriate cases. Our analysis of FS 2019 PRWVH cases showed that many returns that were not cleared by the systemic matching process required the taxpayer to file a Form 1040-X, Amended U.S. Individual Income Tax Return, to correct an error before the IRS released the refund. In many cases, the taxpayer needed to file an amended return because the taxpayer did not report the full amount of wages or withholding on the return. The first step taxpayers should take is to carefully review their returns to ensure that all income and withholding is correctly reported and that there are no other obvious errors on the return. If a taxpayer discovers an error, a Form 1040-X should be filed with the IRS. Taxpayers do not need to seek TAS assistance in this situation.For cases accepted by TAS where it is determined that a Form 1040-X is needed, the assigned Case Advocate will discuss the needed corrections with the taxpayer and identify where to mail the Form 1040-X to the IRS. Once the taxpayer has been educated, TAS will close the case. We will explain the normal processing timeframe for these amended returns and advise the taxpayer to contact us again if assistance is needed after that timeframe.

   Example: A taxpayer used her last paystub rather than the Form W-2 to calculate wages on her tax year 2019 Form 1040. As a result, the amount of wages reported on the return did not match the information received by the IRS. After TAS accepted a case from this taxpayer, the error was identified. To correct the error, the taxpayer will need to file an amended return and will receive specific instructions from her assigned Case Advocate. At that time, TAS will close the taxpayer’s case. If the taxpayer’s issue does not resolve within the normal processing timeframe provided by TAS, the taxpayer can contact TAS again for assistance.

The goal of these changes is to allow normal IRS return processing to work as anticipated, and for TAS to intervene in cases that require a greater advocacy effort or where a taxpayer’s rights are being impaired. Beyond assisting taxpayers in appropriate cases, TAS will continue to monitor the processing of returns held by the PRWVH program and recommend systemic improvements to reduce the adverse taxpayer impact of false positive results.