By Ray Martin MoneyWatch
March 10, 2016, 5:00 AM

The IRS' identity-theft prevention tool is broken

The IRS can't seem to get its act together. In its effort to combat fraudulently filed tax returns, last year the IRS launched a new tool it claimed would better protect victims of identity theft. This week, the IRS announced that because of a possible security breach, it has suspended the tool, known as the Identity Protection PIN tool, or IP PIN, on the site.

The IRS designed this tool specifically to allow victims whose identity had been used in fraudulent tax returns to obtain a PIN that would positively verify their identity before they filed any subsequent return.

The IRS said, "Taxpayers received 2.7 million IP PINs by mail for the current filing season. About 5 percent of those -- approximately 130,000 -- used the online tool to try retrieving a lost or forgotten IP PIN." The latest problem involves the application of IP PIN that recovers a PIN for a taxpayer who has lost it. The agency added: "Most taxpayers receive their IP PIN via mail and never use the online tool."

The IP PIN, a six-digit number assigned by the IRS to taxpayers who've been victims of fraudulently filed returns, was supposed to be the IRS' strongest defense against ID theft. Once you opt in to use an IP PIN, you can't opt out and must use it to confirm your identity on all federal tax returns. If you e-file return is missing your IP PIN or it's incorrect, the IRS will reject the return.

Apparently, however, the IRS didn't anticipate that thieves would steal IP PINs. That's right -- the IRS' best defense against ID theft and fraudulently filed tax returns was compromised.

According to reports, when a number of taxpayers who were victims of fraudulently filed tax returns in 2014 tried to use their IP PIN to file their tax returns this year, they learned that identity thieves had struck again --- using their identity and their special IP PIN to file a fraudulent return.

Through the end of February the IRS has confirmed it had detected and stopped 800 fraudulent returns using a stolen IP PIN. It hasn't confirmed how many IP PINS were stolen or used to file returns fraudulently.

It bears repeating: The best defense to minimize being a victim of tax return fraud is to get your return prepared and filed as quickly as possible. That's because if the fraudulent return is filed after you've already filed, the bogus one is more likely to be rejected.

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