Tax refunds and stimulus checks delayed by identity fraud crossfire

Jeff Lavigne plans to use a tax refund this year for long-delayed medical help.

Yet his refund, almost $2,700, has been in limbo since mid-March, when Lavigne filed his tax return, records show.

The IRS flagged the return for potential identity theft — as it did for nearly 2 million Americans last year.

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The money has been withheld until Lavigne can verify his identity. The process has proven difficult — phone lines are clogged and online authentication is unavailable.

Lavigne, 42, has chronic back pain that makes work difficult over sustained periods. The former restaurant manager doesn’t have a full-time job or health insurance. An extra $2,700, which includes pandemic stimulus funds, would help pay for monthly premiums and let him visit a specialist.

“I started making plans in my head, in terms of getting the help I need,” said Lavigne, who lives in a suburb of Dallas. “I’m trying to take one step at a time, and this is step one.”

It’s unclear how many taxpayers’ refunds have been delayed during the 2021 filing season. But it’s an issue for a growing number of Americans.

The IRS flagged 5.2 million tax refunds for fraud last year, a nearly 50% increase over 2019, according to the Taxpayer Advocate Service, an independent organization within the IRS.

Of those, about 1.9 million were flagged for identity screening. (The rest were earmarked for income verification.)

Basically, the IRS wants to ensure a crook isn’t using a taxpayer’s identity to claim a tax refund. The agency mails letters (either a 5071C or 6331C letter) to taxpayers if it suspects foul play. The IRS can’t process a tax return or issue a refund until the person responds.

However, most flagged returns aren’t fraudulent. In 2019, 63% of the refunds vetted for identity theft turned out to be legitimate, according to the Taxpayer Advocate Service.

While the IRS ultimately issues the money (with interest) in these cases, taxpayers sometime wait months. About 18% of refunds flagged for identity verification took longer than 120 days to arrive, according to the Taxpayer Advocate Service. (Most take less than 21 days for online filers or six weeks for mailed returns, the IRS said.)

Refund delays were among the top 10 most serious taxpayer problems in 2020, the Taxpayer Advocate Service said.

Dan Herron, a certified financial planner and accountant, waited almost a year for a tax refund after filing his return in 2019, which got flagged for possible identity fraud.

“It was a pretty lengthy, drawn-out process,” said Herron, a principal of Elemental Wealth Advisors in San Luis Obispo, California.

“I wish [the IRS] had something more streamlined,” he added. “They’re so archaic in the way they do things.”

Delays were likely exacerbated by the Covid pandemic since the IRS had to temporarily suspend some of its in-person operations, according to Nina Olson, executive director and founder of the Center for Taxpayer Rights.

And the wait may cost taxpayers more than usual this year. The IRS is using 2020 tax returns to determine eligibility for pandemic stimulus checks and advanced payments of the child tax credit, which will be paid monthly starting in mid-July.

The agency uses information (such as annual income) on a 2019 return if a 2020 return hasn’t been processed. But that may lead to reduced payments — or no payments — depending on a taxpayer’s situation.

“Ultimately they might get their money but they’re not getting their money now,” Olson said.

Taxpayer advocates don’t dispute that stopping thieves from ripping off individuals and the government is a worthwhile goal.

“Identity theft has been on this upward curve since 2005,” Olson said. “It’s a huge issue.

“And thieves are getting smarter.”

The IRS fraud measures protected $3.5 billion in revenue in 2019, according to the agency. (About $2.5 billion was due to identity theft filters.)

And 98% of tax returns claiming a refund aren’t ensnared by the process, the agency said.

“We understand the concerns of how refund delays can impact taxpayers, and we continue to collaborate with internal and external partners to refine and automate refund fraud filters where appropriate,” the IRS said in response to a Taxpayer Advocate Service report to Congress last year.

Without proper validation, the IRS risks issuing improper refunds, the agency said.

However, IRS systems, staffing and processes are combining to delay too large a share of refunds, taxpayer advocates said.

For example, many people are given the option of verifying their identities online using an IRS website. To do so, they must first go through an authentication process called “Secure Access.” But less than half succeeded in 2020, according to the Taxpayer Advocate Service.

Such taxpayers must then interface with an IRS agent, over the phone or at a field office, for a resolution. Right now, the IRS doesn’t have enough staff to manage the volume efficiently, Olson said.

IRS technology also doesn’t leverage machine-learning — meaning the system can’t adapt automatically if it’s tripping up too many legitimate taxpayers, she added. It requires a manual fix.

“You are setting a goal to stop fraud, but not setting a goal to minimize false positives,” Olson said of the IRS. “And good systems do both.”

While fraud letters request a response within 30 days, the IRS will continue to work with taxpayers regardless of the amount of days that have passed, according to the IRS.

The IRS budget — which largely covers personnel — has fallen by 20% in real terms over the last decade, Mark Mazur, deputy assistant secretary for tax policy at the Treasury Department, said Thursday during a House of Representatives hearing.

“The IRS has had insufficient resources to meet enforcement and administrative challenges and to deliver customer service to taxpayers,” Mazur said.

Technology upgrades would also improve service, by letting taxpayers communicate with the IRS in a “clear, timely manner,” he added.

Lavigne had been thwarted at each juncture by the time CNBC initially spoke to him on Tuesday.

He was unable to verify his identity online and couldn’t reach a phone representative due to a high volume of calls into the agency. He hadn’t been able to schedule an appointment at a local branch.

Lavigne wasn’t even sure he could physically attend an in-person meeting — traveling for long stretches is prohibitive due to his spine problems, he said.

However, Lavigne’s luck changed on Thursday. He was able to reach someone by phone at the local office in Farmers Branch, Texas. After an hour and a half, a representative completed the identity verification over the phone, Lavigne said.  

“She explained there is a very long list of filters in place to reduce ID theft and nobody can know how it exactly works so that thieves cannot create a way to work around that,” he recalled of their discussion.

Now, the funds will take up to nine weeks to arrive.

“She said I am definitely good to go now,” Lavigne said. “But if I do not receive my check or another letter between now and the end of the nine weeks, which is sometime in August, [she said] to call back.”