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Today, members of the House Committee on Small Business held a hearing discussing how to ensure resources to combat tax fraud and scams are adequately accessible and available for small businesses. 

“Small business owners are already hampered by compliance costs and the worry over data security adds an additional layer to that complexity,” said Rep. Nydia M. Velázquez (D-NY), the Ranking Democrat on the Committee. “Identity theft - and the refunds claimed from it - has become an increasing problem the IRS is battling to address.” 

Threats such as identity theft are plaguing taxpayers and businesses at alarming rates. In 2010, the Internal Revenue Service (IRS) reported 339,000 cases of identity theft, while in 2013 that number grew to over 2.9 million. As a result of the potentially higher payoff when scammers commit fraud to target a business, business identity theft is on the rise.

Fraudulent acts have tremendous consequences and the IRS is not always able to recover stolen funds. In 2013, of the $30 billion lost in identity-theft related fraud the IRS was able to recover $24 billion. Further, the agency detected and rejected 1.8 million fraudulent returns in 2014 adding up to 22.5 billion in refunds. On the other end, the IRS paid out around $3.1 billion worth of fraudulent returns. 

The month of April is a busy time for both everyday Americans rushing to file their taxes and for the IRS. In addition to collecting taxes from millions of Americans, the IRS bears significant customer service and protection responsibilities. Among them, it’s their duty to protect Americans from third party scams, hacks, fraud, and security breaches. The IRS also makes agents available to assist taxpayers with various questions and concerns. 

The IRS publishes a list called the “Dirty Dozen” every year which warns taxpayers of detected scams. Additionally, the IRS conducted a stakeholder meeting, the Security Summit Initiative to discuss innovative ways to address security threats and fraud.  

“While, this is a step in the right direction, more must be done to address the needs of small business taxpayers and their battle against criminals,” said Congresswoman Velázquez.  

In his testimony, Inspector General for Tax Administration (TIGTA), Mr. J. Russell George informed members of the committee of the Business Identity Theft Project, designed to screen for potential business identity theft. His office also found that Employer Identification Numbers (EIN) can be better used by the IRS as data to combat potentially fake businesses. In 2014, an analysis of 233 suspicious EIN business tax returns found that 97 of those businesses claimed refunds adding up to over $2.5 million. 

“While the IRS’s identification and detection strategies have led to many notable improvements, it recognizes the need to continue to explore other initiatives that would assist with its overall detection and prevention efforts. These initiatives include a collaborative effort among IRS officials, representatives from leading tax preparation firms, software developers, payroll and tax financial product processors, and representatives from the State Departments of Revenue to discuss common challenges and ways to leverage collective resources and efforts for identity theft detection and prevention,” Mr. George testified. 

“I hope we can take the lessons from the audits performed by TIGTA and develop multi-tiered approaches to combat identity theft and other scams harming our nation’s small businesses,” said Congresswoman Velázquez. 

Since 2010, the IRS budget has been cut by 17 percent and the agency has been forced to stretch resources and rollback on services, including conducting fewer audits. The Trump Administration has further proposed to cut the IRS’s budget by around 14 percent. 

“We must also recognize that the IRS is under fiscal strain from consistent budget cuts. It is up to Congress to give them the resources they need to adequately serve taxpayers,” said Congresswoman Velázquez. 

By putting small businesses at the center of the conversation, Democrats hope to educate small business owners on how to detect and respond to the possibility of identity theft and tax fraud.