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Why Your Tax Return Isn't Safe

The Wall Street Journal

The millions of Americans who are rushing this weekend to file their tax returns to the Internal Revenue Service will be relieved to have beaten the April 15 deadline on Monday. But thousands of them, along with thousands of other taxpayers who have already filed, will be stunned when they learn in the coming weeks and months that their returns have been rejected.

Why would the IRS reject them? Because these taxpayers will turn out to have been the victims of identity-theft tax fraud. The increasingly common scam costs taxpayers $5 billion a year.

Here's how this type of identity theft works: The scammer steals an individual's name and Social Security number and uses that information to file a phony tax return. Soon after, he receives a refund from the IRS, which has little reason to question, at least initially, an authentic-lookingreturn. When the actual taxpayer files a return claiming a refund, the return is rejected.

With the increasing popularity of e-filing returns online, the theft has been made easier than ever. According to the IRS, identity-theft tax cases have jumped 650% since 2008, with the IRS working on nearly 650,000 identity theft cases during 2012.

One of the most frustrating aspects of these crimes for many local prosecutors—and I am one of them—is that even though we know the ripoffs are taking place, and we have the resources and expertise to investigate and prosecute, our hands are tied. Current federal law prevents the IRS from turning over the very evidence of the crime—the fraudulent returns—that state and local prosecutors need to bring the scammers to justice.

Although federal authorities also handle these cases, and IRS criminal investigators are highly proficient, the volume of IRS business means that, on average, it takes more than six months for stolen-identity cases to be resolved. The delay poses particularly difficult challenges for lower-income taxpayers, who rely on these refunds to help pay for basic necessities. And without quick investigation and prosecution of the perpetrators, victims may be left open to repeated victimization by identity thieves. A recent report by NBC News examined this issue and found that some taxpayers are being victimized year after year—even after their accounts have been flagged by the IRS.

Today's thieves and scam artists are taking their criminal activity off the streets and moving it online. My office alone investigates approximately 200 to 300 new identity-theft cases each month. In Manhattan, we have a cyber lab, as well as prosecutors and analysts who are specially trained to investigate cybercrime and identity theft. In case after case, we have brought identity thieves to justice, but these cases are generally not about tax-refund theft because of the federal restrictions.

Last year, my office was able to file an indictment against an identity-theft ring for submitting phony tax returns in the names of more than 300 victims. How? We discovered that the defendants had used a third-party online tax-service provider to submit phony returns, so we were able to collect the same invaluable evidence—the returns themselves—from the provider that current federal law does not allow the IRS to provide to us.

We are not so lucky in most other instances. At a time when cybercrime and identity theft are the fastest-growing crimes in the country, why make state and local law enforcement jump through hoops to collect important evidence that is readily available to federal prosecutors? If federal law granted us direct access to the necessary documents, we could be doing much more to help identity-theft tax victims, bringing many more cases in state court and stopping many more identity thieves from ripping off taxpayers.

To that end, I believe that federal lawmakers should expressly authorize the IRS to share taxpayer information with state and local law-enforcement authorities in any case where it appears that a fraudulent tax return has been filed. In addition to bringing criminals to justice, we can aggressively seek to recover the stolen money—tax revenues that the government sorely needs in this era of budget sequestration—rather than allow those dollars to line the pockets of identity thieves.

Yes, current federal law is designed, in part, to protect the privacy of taxpayer information. But the taxpayers at issue here are victims, and in cases where we do find them, they readily welcome our involvement. As law-enforcement agents, we are trained to handle highly sensitive, confidential information every day in nearly all of our cases—sex crimes and other special-victims cases, drug and gun trafficking, white collar crime, cybercrime, and, of course, other types of identity theft.

In a recent report to Congress, the IRS's taxpayer advocate noted that the agency is "falling further and further behind" in blocking fraudulent claims. The feds can't do it alone. Local prosecutors' other federal partners regularly share documents and information with our office. The IRS should be no different.

Mr. Vance is the Manhattan district attorney.