Victim of identity theft? Expect a long wait for your tax refund

Expecting a tax refund? Don't hold your breath if someone stole your identity and already tried to claim your refund.

If you're a victim of identity theft, expect a long wait for your tax refund.

The IRS told taxpayers to expect to wait 180 days -- or nearly six months -- for their returns to be processed last year if they had their identity stolen, the Taxpayer Advocate Service, which is the watchdog arm of the IRS, said in an annual report to Congress. And unless action is taken to speed up the process, taxpayers could see similar -- or even longer -- delays this year.

With three-quarters of Americans owed refunds averaging around $3,000, this is "an unacceptable period of time to expect taxpayer-victims to wait," National Taxpayer Advocate Nina Olson said in a statement. Complicated cases leave some victims waiting even longer, she said.

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The watchdog said the IRS waits to give refunds to identity theft victims until it conducts a slew of paperwork for internal purposes -- even if it has already determined that the victim is owed a refund. Giving the victims their refunds as soon as their identities are verified would cut their wait times significantly, the TAS said.

It also recommends that the IRS set up a single point of contact for identity theft victims, rather than the 21 individual units the agency has created to assist with these cases.

The IRS responded in the report that its current setup is effective because each group has a specific specialty. It also said it has improved its procedures for stopping identity theft, and is dedicating an increasing number of resources to the problem -- including nearly tripling the number of employees handling these cases.

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The IRS didn't respond to a request for comment about how long it takes to resolve identity theft cases.

While specific data on resolution time wasn't made available to TAS, it said an internal memo from the IRS last year directed employees to tell identity theft victims it would take 180 days to resolve their cases. And in response to a request for information from TAS in November, the IRS said it took 196 days to resolve certain cases.

The long waits come as the IRS struggles to keep up with a surge in fraud. More criminals are finding ways to steal Social Security numbers and filing fraudulent tax returns claiming big refunds. As a result, TAS has seen tax-related identity theft climb more than 650% from 2008 to 2012. By the end of 2012, 650,000 identity theft cases within the IRS remained unsolved, the report found.

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Annual budget cuts since 2010 have also made it much harder for the IRS to put a stop to the increase in identity theft -- let alone answer all the phone calls it receives, TAS said. In fact, the IRS only answered 68% of its calls last year -- down from 87% in 2004. And callers waited an average of 17 minutes on hold, up from only two and a half minutes in 2004.

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Cutting IRS funding is counterproductive, Olson said. While the agency has an extremely high rate of return -- bringing in $214 for every $1 spent last year -- its ability to bring in revenue is severely limited as funding drops. And more budget cuts are on the table this year.

In the annual report, Olson listed more than 20 big problems that taxpayers encounter. The issue she cites as the most serious is the complexity of the tax code, which she says imposes a "significant, even unconscionable, burden on taxpayers" and even makes it easier for criminals to commit tax fraud.

She said Congress has added almost 5,000 changes to the tax code since 2001 -- an average of one per day. There are now nearly four million words in the tax code, and taxpayers and businesses spend roughly 6.1 billion hours per year filing their taxes.

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