Tax-related identity theft rose 644%, IRS official says

BLOOMBERG NEWS
Tuesday, July 8th 2008, 11:21 AM

Tax-related identity theft grew more than seven times over a four-year period ending Sept. 30, according to a new report that said efforts by the Internal Revenue Service to deal with problem are further hurting victims.

Nina Olson, the National Taxpayer Advocate, said in a report to Congress that identity theft is one of the biggest problems facing taxpayers today. She said her office handled 644 percent more cases in fiscal 2007 than in fiscal 2004 as crooks used stolen Social Security numbers to seek fraudulent refunds or employment.

Efforts by the IRS to combat the problem have resulted in delayed or frozen refunds for legitimate taxpayers or collection actions such as liens and levies. The IRS also has trouble preventing income, and tax liability, earned by workers using stolen Social Security numbers from being allocated incorrectly to the real owner of the number.

"While the IRS is reforming some aspects of its approach to identity theft, its procedures for dealing with victims have been a significant part of the problem," Olson said in the 156-page report released by the IRS today. The mid-year report is one of two required by law.

Olson also said the IRS must do a better job educating taxpayers about rules for avoiding taxes on forgiven debt.