WTHR investigation, congressional pressure trigger IRS policy change

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WASHINGTON (WTHR) — Growing pressure from Capitol Hill has prompted the IRS to reverse a controversial policy exposed by WTHR.

That policy, written into the Internal Revenue Manual but kept confidential from the public for more than a decade, instructed IRS employees not to warn taxpayers who had become victims of employment-related identity theft.

Instead, millions of unsuspecting identity theft victims received letters from the IRS incorrectly alleging they underreported their income and owed the IRS hundreds – even thousands – of dollars in unpaid taxes and penalties.

A series of reports by 13 Investigates combined with months of silence and inaction from the IRS prompted a firestorm in Washington, DC, now culminating in the agency's decision to alter its longstanding policy.

"I can't believe this is happening"

“We're not allowed to say anything”

Chances are, you'd never allow someone to use your Social Security number without your permission.

But the IRS has been doing exactly that – allowing millions of undocumented workers to file their tax returns using someone else's Social Security number that was obtained to get a job.

It is illegal, but the IRS has been looking the other way for more than a decade by saying its primary role is to collect taxes, not to police illegal activity involving employment-related identity theft.

As a result, the IRS has been accepting tax returns from undocumented workers that contain clear signs of fraud. The IRS acknowledges it has been processing "Social Security number mismatches," which occur when an undocumented worker submits a single tax return using two different identification numbers: a Social Security number to show proof of income that is different than the Individual Taxpayer Identification Number (ITIN) to show identity.

That is a glaring red flag for identity theft, and IRS whistleblowers told Eyewitness News they had no choice but to accept the clearly fraudulent tax returns despite voicing repeated concerns to IRS supervisors.

"We are not supposed to do anything. Just let it go," said one such whistleblower who requested anonymity for fear of losing her job as an IRS tax examiner. "We know it's a lie. We know they are stealing someone else's Social Security number to get a job and to get a refund, but we're not allowed to say anything."

She said the policy was spelled out in a secret IRS policy -- later obtained and released by 13 Investigates.

It explains why millions of people – like David Burian and Alfred Allen – were never told their identities were stolen, even though their Social Security numbers were used by strangers to file tax returns.

The Hoosier taxpayers recently received letters from the IRS accusing them of misreporting their true income. In reality, undocumented workers had used their Social Security numbers to get jobs, earn income and to file taxes. While IRS tax examiners can easily spot employment-related identity theft on tax returns marked with Social Security mismatches, Burian and Allen were never notified that their identities were stolen – only that the IRS wanted more money.

"That's wrong," Burian told WTHR. "They never told me anything."

"It's absolutely awful," added Allen, who's been dealing with the same IRS problem for several years. "I can't believe this is happening. If they know about it, why wouldn't they tell me? It shouldn't be kept a secret."

The office of the U.S. Treasury Department's Inspector General for Tax Administration has been advocating for the IRS to better warn victims of employment-related identity theft for more than a decade, and it says Burian and Allen have plenty of company.

"It affects millions of taxpayers," said TIGTA deputy inspector general Russ Martin.

Lawmakers outraged

After watching WTHR's investigation, Senator Dan Coats (R – Indiana) immediately demanded answers from the IRS.

"I want to see if you can address it or are in the process of addressing it .... so it doesn't happen again," Coats told IRS Commissioner John Koskinen at a Senate Finance Committee hearing in October.

Koskinen responded by saying there was little his agency could do to stop the problem for fear of discouraging undocumented workers from filing tax returns. That did not sit well with Coats.

"I'm outraged. Anybody's Social Security number is personal to that person," he told 13 Investigates after the hearing. "This is one of the biggest pieces of abuse that I've come across. This is an outrage and it needs to be addressed."

But the IRS did not address the issue. So this month, at another Senate Finance Committee hearing, Coats again pressed IRS leaders for change.

"We learned that the IRS identified 200,000 cases new cases of employment-related identity theft last year and marked the victims' accounts, yet did not notify the victims," the senator explained to Koskinen and TIGTA chief Russell George. "Where do we go? I think all of us can agree that victims need to know they're victims."

The IRS commissioner tried to downplay the problem, telling lawmakers that millions of Social Security numbers used illegally isn't fraud, but instead just "borrowing."

"A lot of times those Social Security numbers are, in fact, borrowed from friends or acquaintances and people know they've been used. Other times they don't," Koskinen said, adding that his agency's main role is simply to collect taxes – even if that means accepting tax returns from individuals who are improperly using someone else's Social Security number.

"The IRS commissioner is way off base on this one, and I think he was embarrassed his answer was so dismissive," a frustrated Sen. Coats said after the hearing.

The commissioner's reply frustrated other lawmakers, too. Over the past two weeks, both senators and representatives challenged Koskinen on what they consider to be a unsettling response.

Rep. Dave Brat (R – Virginia) confronted the IRS commissioner the very next day at a House Small Business Committee hearing. "Should any agency go along with what it knows to be illegal activity?" he asked Koskinen.

A few days later, Sen. Orrin Hatch (R – Utah) weighed in, as well.

"It's unfathomable to me the IRS would turn a blind eye to this problem when legitimate taxpayers are stuck with the consequences of someone using their Social Security number to gain employment," he said.

IRS changes course

Following the growing pressure from Congress, the IRS is now changing its policy.

WTHR has learned the IRS will begin to notify victims of employment-related identity theft instead of keeping it a secret. The IRS has not publicly announced the change, but it will take effect in January, according to an internal document obtained by 13 Investigates.

It is not clear whether the IRS notification program will be permanent or a temporary measure, similar to a recent pilot program to notify some victims of employment-related identity theft. The IRS abandoned that pilot program in 2015 without explanation.

In the meantime, Senator Coats is not taking any chances.

"I want to put it in law so [the IRS] has no choice but to do that," he said.

That's why Coats introduced an amendment to a Bill to Prevent Identity Theft and Tax Refund Fraud and to the Taxpayer Protection Act of 2016 that would force the IRS to notify victims of employment-related identity theft. The legislation also mandates the IRS and Social Security Administration to share information with each other to facilitate notification and to reduce identity theft.

The amendment received overwhelming support from the Senate Finance Committee, and now moves to the full Senate.

"We got a unanimous vote from both Democrats and Republicans, and I think it never would have happened unless someone had come to me with a personal story," Coats said. "When you make it personal as we did here with a Hoosier with identity theft [and] stolen identity, affecting his family in a negative way, it brings it home because people can identify. That could happen to me."

Lawmakers aren't the only ones putting pressure on the IRS.

Following WTHR's report, TIGTA has been investigating the IRS's policies on employment-related identity theft. The inspector general findings will be released in June.

The IRS told WTHR it will not comment on the issue until it figures out specifics of its new policy.

"We're still working out the details of the policy change to advise people of possible misuse of their Social Security number, and we will have more details to share in the near future," said an IRS spokesman.