The Government Accountability Office reported that in 2008 the IRS had cataloged over 50,000 incidents of identity theft related refund fraud and employment fraud. Approximately 90% of those incidents were stopped before refunds were issued, with about 15 millions fraudulent refunds being sent out.
90% sounds good, but that's only including the incidents that the IRS recognized as fraud. The IRS does not know the amount of tax refund fraud that goes undetected. In 2008, the IRS implemented new initiatives to protect consumers from fraudulent activity, including utilizing an identity theft indicator that it places on victims' accounts so IRS personnel can more readily recognize the victim if future problems occur. They have also decentralized the fraud assistance process, making the area of the IRS that discovers the problem responsible for getting it corrected.
The IRS claims it is hampered in its efforts because of privacy concerns, which limits its ability to coordinate with other agencies.
The report from the GAO does not include the IRS' role in other instances of identity theft. For instance, I am currently represnting an identity theft victim whose identity thief obtained student loans using my client's name and SSN. When the student loan was not paid by the identity thief (or my client who had no idea there even was a student loan in his name), Sallie Mae, the servicer of the loan, assigned it to a collection agency for collection. My client was contacted and he repeatedly disputed the fraudulent student loan with Sallie Mae, the collection agency and the CRAs. Despite his disputes, Sallie Mae caused the IRS to seize my client's legitimate tax refund (approximately $3100). After disputed this some more, the IRS wrote him and told him the hold on future refunds was lifted, but it did not pay him the $3100 it had already seized. Then, the next year, the IRS again seized my client's tax refund and then, after the seizure, wrote another letter that the hold had been lifted.
I doubt the GAO's survey includes this particular type of fraud being committed on the IRS, fraud by Sallie Mae and its collection agencies. But something needs to be done about that to protect future consumers.