The budget compromise heading to President Obama's desk for his signature includes a provision to limit access to one of the most common vehicles for identity theft: the Social Security Administration's "Master Death File."
The online index, which includes records of the more than 85 million deaths reported to the agency since 1936, was designed to help researchers, insurers and investigators verify deaths. But it has also given criminals ready access to a trove of Social Security numbers.
In January, CNBC reported on the plight of Terry and Stephanie McClung of Finksburg, Md. Still mourning the death in 2009 of their 5-month-old daughter Kaitlyn from Sudden Infant Death Syndrome (SIDS), the couple filed their income tax return the following year claiming her as a dependent—"the very last time that we had to claim her as our own," Stephanie McClung said.
But the IRS rejected the return because someone else had already used Kaitlyn's Social Security number, apparently obtained through the Master Death File.
Through a SIDS support group, they learned many other parents had similar experiences.
"It's salt in the wounds," Terry McClung said.
Stolen identity tax refund fraud has become a major priority for law enforcement in recent years, but the Treasury Inspector General for Tax Administration reported in September that despite the crackdown, the IRS issued about $3.6 billion in potentially fraudulent refunds last year.
In addition to limiting access to the Master Death File to individuals certified by the Commerce Department, the budget bill increases fees for accessing the list and penalties for those who abuse access.
Sen. Bill Nelson, D-Fla., wrote the provision and said in an email to CNBC that it's about time it became law.
"Too many taxpayers are having their tax refunds swiped by identity thieves," he said. "This should put a big dent in this kind of crime and save the taxpayers money that's otherwise being stolen."
The Congressional Budget Office estimates the reform will save taxpayers $786 million over 10 years.
Meanwhile, the IRS is continuing to tighten its controls. In its September report, the Inspector General said that the efforts are helping but that more work needs to be done. For example, the report said, the IRS still has not taken action to prevent multiple tax refunds from being deposited to the same bank account.
"This continues to provide identity thieves with an easy method to obtain fraudulent tax refunds," the report said.
The new restrictions on the Master Death File could help close a significant loophole, though they come too late for the McClungs. Nonetheless, Terry McClung, who testified before the Senate Finance Committee on the issue in 2011, said he and his wife are gratified by the change.
"We're honored to have had any kind of influence, however small it might have been, to make this possible," he said in an email. "While we'll never know who stole Kaitlyn's identity, this is finally one small form of closure for this case."
—By CNBC's Scott Cohn. Follow him on Twitter @ScottCohnCNBC.
—CNBC News Producer Michael Tomaso contributed to this report.