As lawmakers in Washington and the White House haggle over how to shave billions in spending from the budget for the current fiscal year, we have the opportunity to seize on an obvious reform that could save taxpayers a lot of money: getting deadline serious about reducing fraud and bolstering the identity theft defenses of large government agencies and programs like the IRS and Medicare.

As we now know from the latest Federal Trade Commission report on consumer complaints, fraud related to government documents and benefits represents the single largest category of identity theft in the United States: In 2010 it accounted for 19 percent of all identity theft, up from 16 percent in 2009.

Fake credit cards used to be the favored vehicle for ripping off innocent consumers, but that type of crime is receding as banks and other card issuers tighten their security measures. In 2008 credit card fraud accounted for one out of every five reports of identity theft, in 2009 the proportion fell to 17 percent, and in 2010 it dropped to 15 percent.

“This shows that the IRS and programs like Medicare could still benefit from more active fraud and identity theft investigation and victim assistance and fewer budget cuts in these areas,” says Eduard Goodman, chief privacy officer for Identity Theft 911.

The federal government essentially is a “processing machine” when it comes to issuing benefits checks and may have little operational incentive to reform its practices from a fraud perspective, said Victor Searcy, Identity Theft 911’s manager of fraud operations.

At Identity Theft 911, we’ve been tracking the growing problem of tax refund fraud, such as when a thief uses a taxpayer’s ill-gotten personal information to create a phony tax return. In one case we highlighted in this month’s newsletter, an Illinois retiree had his federal refund ripped off when a con artist simply mailed in a follow-up tax form filled out with only the minimum of information about the taxpayer.

The retiree eventually got his full refund, but that case, and many others like it, shows just how vulnerable a sprawling government agency like the IRS is. Tax- and wage-related fraud leaped from 12.3 percent of all identity thefts in 2008 to 15.5 percent in 2010, according to the FTC. Meanwhile, the fraudulent use of government benefits is also on the rise, going from 1.3 percent to 1.8 percent during the same period.

“This shows that the IRS and programs like Medicare could still benefit from more active fraud and identity theft investigation and victim assistance,” Goodman said.

To protect yourself against tax-related identity theft, follow these tips featured in our monthly newsletter.

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