This post is by Richard Rubin of Bloomberg.com.

The Internal Revenue Service is reviewing almost 2 million tax returns for possible fraud, Deputy Commissioner Steve Miller told a U.S. Senate subcommittee recently.

With less than a month remaining in the tax-filing season, that number "approaches the total" of returns identified for review in 2011, Miller said. A primary cause of such fraud, he said, is identity theft.

"The IRS is confronted with the same challenges as every major financial institution in preventing and detecting identity theft," he said. "We cannot stop all identity theft. However, we are better than we were, and we will get better still."

Last year, the IRS prevented the issuance of $14 billion in fraudulent refunds, Miller said. This year the agency has added hundreds of employees to its anti-fraud efforts and has implemented new filters that flag questionable returns. (Post continues below video.)

Legitimate refunds are delayed when the IRS spends additional time reviewing returns before issuing refunds, said Nina Olson, the national taxpayer advocate. When the IRS tries to speed up returns, fraudulent refunds are issued.

"There is no way around these trade-offs," said Olson, who runs an independent office inside the IRS.

Sen. Bill Nelson, a Florida Democrat, said criminals have turned to tax fraud instead of stealing cars or dealing drugs, affecting honest taxpayers.

"Their lives are being turned upside down by identity theft and then tax fraud," said Nelson, who is chairman of the Senate Finance economic growth and fiscal responsibility subcommittee, which held the hearing. "They have their tax refund stolen, and then they are delayed when the IRS sorts out the mess."

Criminals receive identifying information from a variety of sources, according to Miller’s testimony. He cited the case of an Alabama woman, sentenced to prison, who obtained information about student-loan borrowers from her former employer and then filed false tax returns.

Some prisoners also file fake tax returns and claim refundable tax credits, Miller said.

"We see thefts from schools," he said. "We see thefts from hospitals, doctor’s offices."

Nelson has introduced legislation that would impose tougher penalties and make it harder to gain access to the Social Security numbers of people who have died.

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