IRS Flags Over 1 Million Tax Returns for Review Citing Possible Identity Theft

The Internal Revenue Service headquarters building in Washington is seen in a file photo. (Chip Somodevilla/Getty Images)

The Internal Revenue Service (IRS) has flagged over 1 million 2022 tax returns for additional review over potential identity fraud, according to a recent report.

The Treasury Inspector General for Tax Administration’s interim results (pdf) of the 2023 filing season, which they released on May 10, cited 1.1 million identified as of March 2 that warranted a closer look.

The IRS stated that thus far, they have confirmed that 12,617 of the tax returns were fraudulent, and they prevented the distribution of refunds totaling $105.3 million.

During the last tax year, the IRS only identified 9,626 as confirmed fraudulent returns, with the 2023 filing period already seeing a jump of roughly 3,000 illegal returns.

According to the study, the agency would employ 236 different filters during the tax filing season of 2023, which is an increase from the 168 filters that were used during the tax filing season of 2022.

The Treasury Inspector General’s office went on to explain that the filters consist of reported income and withholding amounts, filing requirements, age, filing history, and prison status. These characteristics are derived from tax returns that have been shown to be false.

If a tax return is flagged by an agency filter, the Internal Revenue Service (IRS) will not process it until the taxpayer’s identification has been verified.

The IRS anticipates to collect 167 million individual income tax returns in the year 2023. As of March 3, 2023, the IRS had received 54.9 million tax returns, of which 53.6 million (or 97.5 percent) were filed online and the IRS has distributed $127.3 billion in tax money.

According to recent expert testimony before the Senate, the IRS’s increased enforcement activities are likely to impact small and midsize businesses.

Chris Edwards of the CATO Institute testified before the Senate Finance Committee on May 16, explaining that the Biden administration’s promise that there won’t be more tax audits for companies and families making less than $400,000 per year applies to “total positive” income, which means that there are no losses.

The committee heard testimony on May 16 about the impact of the additional $80 billion being allocated to the IRS as part of the Inflation Reduction Act.

Sen. Chuck Grassley (R-Iowa) asked Edwards about the administration’s promise during his hearing. Edwards confirmed that the IRS plan was to assess income without accounting for losses and that the increased audits would likely impact “mainly small to midsize businesses, who actually may have [adjusted gross income] under 400,000.”

Edwards also pointed to the fact that, on many occasions, when audits lead to enforcement, the IRS is not correct in its assertion: “If you look at tax court cases over the last five years, the IRS gets it wrong about half the time,” he said.

“The IRS only got 48 percent of the dollars that it demanded.”