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Tax Guide
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Guarding Against Tax Refund Fraud

Guarding Against Tax Refund Fraud

This year’s tax filing deadline is fast approaching. If you have filed an extension (or merely procrastinated), it may be a while yet before the IRS has your tax return in hand. But consider this disturbing scenario: what if you were to file only to be notified that the IRS already had a return on file for you?

Identity theft is old news to most people. Unfortunately, criminals are a creative lot, and in the spirit of going where the money is—in this case, with the U.S. government—one of the fastest growing niches in identity theft is tax refund fraud. Dealing with identity theft is a nightmare in and of itself. Throw fraudulent federal tax returns into the mix, and you have the recipe for a horror worthy of H. P. Lovecraft.

The basic mechanics of tax refund fraud

The most common victims are the ones that represent the best chance of success for the criminals, mostly people who do not typically file a tax return: students, low-income families, homeless people, and the elderly, especially those who are housed in a nursing home or other long-term care facility. While at first glance this might seem pointless—who assumes a homeless man is awaiting a sizeable refund?—it can be quite lucrative. In January 2014 Yolanda King of Macon, Georgia was sentenced to 27 years in a federal prison for filing false income tax returns totaling $511,951 of which the government actually paid out $460,692 in refunds—all using identities stolen from nursing home patients. (She had only commenced her fraud in 2010.)

Other popular targets are celebrities, well-known CEOs, military and law enforcement personnel, and politicians and government officials—including U.S. Attorney General Eric Holder, whose personal information was used by an identity thief sentenced in March 2014. Yet even in the case of AG Holder, investigators concluded there was no evidence he was targeted specifically; rather, the perpetrator used data from a public (albeit underground) website that publishes key information such as Social Security numbers, dates of birth, and names. The point is that anyone can potentially be a victim.

As for our hypothetical homeless man, the tax refund fraudster is not particularly concerned about what sort of refund the victim is actually entitled to receive. Bear in mind that tax return processing is highly automated these days, so all the criminal wants is to know that the name and SSN he is using on the return is already in the IRS systems. From there it is simple enough to falsify some income and withholding data to create a return that will provide a generous refund, which is most commonly loaded onto a prepaid debit card.

Tax refund fraud, criminals, and the IRS

Pondering this criminal enterprise, and quite possibly letting your gaze slide over the pile of tax-related paperwork on your desk such as W-2s and 1099s, you might very quickly wonder how the IRS fails to notice that John Q. Public had $60,000 in wage income reported by his employer in 2013, yet his return claims that he made $110,000. (Remember, electronically filed returns aren’t accompanied by copies of the filer’s W-2 or other statements.) The short answer is that while the IRS does cross-check those different data sets, typically that happens long after the return has been filed and any refund issued.

In the name of customer service, the IRS has worked to simplify the filing process and to eliminate paper. It has also made efforts to make it easier for those with no bank account to receive a refund in some form other than a paper check. While laudable, those measures have also opened doors for criminals—and many have adopted tax return fraud as an easy and profitable side gig, even if their primary pursuits are in other areas. In late February 2014, for example, two crack dealers arrested in Miami were found to be running a tax refund scan on the side—perhaps they viewed it as a seasonal opportunity for incremental revenue.

The IRS, by the way, includes a branch called Criminal Investigation that is classed as a federal law enforcement agency, and it has the lead in the investigation of this crime. Because of its expertise and resources, however, the FBI assists as well, and frequently it is local agencies that first uncover the crime in the course of unrelated investigations, such as the aforementioned Miami crack dealers.

How to detect tax refund fraud

For many victims the first indication of fraud is an unpleasant notification from the IRS. This may be a notice that multiple returns have been filed for the same year, that you have a balance due which has resulted or is about to result in collection activity or a refund offset, or that the IRS has detected a mismatch between reported and filed wages or tax withholding. Those who receive some form of government benefits—such as some of the nursing home patients described earlier—may find those benefits abruptly and unexpectedly reduced as a result of higher income reported on a fraudulent return.

Naturally, if you have experienced an incident that could lead to identity theft, such as the loss or theft of a wallet or the hacking of a personal computer, you should be proactive. Even if you have no indication of tax refund fraud (yet), you can notify the IRS Identity Protection Specialized Unit at (800) 908-4490, extension 245 and make the agency aware of your situation. While there is no guarantee that this will prevent a fraudulent return from being filed in your name, it will certainly ease the process of dealing with the IRS should that occur.

Proactive steps to defend against tax refund fraud

Tax refund fraud is merely a specialized form of identity theft, so the same basic rules apply to preventing both.

  • First, protect key identity documents. Social Security numbers have been removed from documents that used to include them, such as drivers’ licenses and military identification cards, so don’t carry your Social Security card with you. Leave it in a secure location at home.
  • Second, on that note, ensure that personal identity information and financial information in your home or office are secured. Don’t leave documents lying around on your desk or elsewhere. If banks will make a deposit to your account based on a picture of a check taken with your smartphone, you can be certain that anyone who comes across important documents—from the maid to the handyman to the pest control guy to visitors in your home—can quickly and easily gather everything they need to commit identity theft against you without leaving a clue.
  • Third, just as you secure physical data, secure your electronic data. Employ screen locks and data protection software on mobile devices like smartphones and tablets. Ensure that your desktop and/or laptop computers have antivirus, antimalware, and antispyware software that is kept updated and that recommended security patches to operating systems and other software are applied.
  • Fourth, don’t provide key identity information over the phone unless you initiated the contact. Even then, don’t provide your Social Security number or a business’s tax ID number unless there is a valid reason to do so.
  • Finally, monitor your credit reports. You are entitled to a free report annually from each of the “Big 3” bureaus (Equifax, Experian, and TransUnion), and there are plenty of both free and paid services that will notify you of any change to your credit file. Challenge any errors you find, and ensure that any accounts that may have been fraudulently opened are closed.

The sad truth is that criminals are and will remain an enterprising lot, and much of the technology that simplifies so many aspects of our lives can be turned to dishonest ends. Constant care and proactive measures can reduce your risk of identity theft, but should you fall victim to tax refund fraud, move quickly and aggressively to engage the IRS and pursue the matter.

Ines Zemelman, EA
Founder of TFX