Tax Refund Fraud – Potentially a $26 Billion Problem over the Next Five Years

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Tax season is over, but the problem of tax refund fraud remains. In fact, the troubles may just be beginning for those who have recently had their tax refunds stolen. And, according to a story from CNN.com, the government has a lot of work to do to stop the problem from growing.

The article reports that the Treasury Inspector General (IG) recently testified before a congressional committee and estimated that federal tax refund fraud is likely to be a $26 billion dollar industry within the next five years. Based on data from 2010, (this estimate is two years old on a fraud that is growing exponentially.) the report notes ”the primary characteristic of these [fraud] cases is that the identity thief reports false income and withholding to generate a fraudulent return…The individuals whose identities were stolen may not even be aware that their identities were used to file a fraudulent return.’? The Internal Revenue Service (IRS) said that the estimate is ”’too high”’ and that the figures don’t reflect recently instituted ”major changes with the way it handles identity theft cases.”

So, where do things go wrong? How do we let these fraud-masters navigate hard-earned taxpayer dollars into their bank accounts?

Insiders are the key – everyone has an insider. They are located at hospitals, doctor’s offices, car dealerships or anywhere else information is stored, and they leak Social Security numbers (SSN) to fraudsters. Once the SSN is obtained, the fraudster can submit a tax return form online with the individual’s actual name, inputting a fictitious income. The genius is in the knowledge that the IRS doesn’t review the attached W-2’s until after the tax return is issued, leaving a chunk of change in a criminal’s account. Realizing this, the Treasury Inspector General has said? ”Direct deposits should not be made to debit cards issue by financial institutions and debit card administration companies that do not take sufficient steps to authenticate individual’s identities.” (Now we’re talking!)

So, how can revenue agencies stop tax refund fraud? By improving the capability to detect that the tax refund fraudster is using a stolen identity. The IRS is already working on this problem – the agency is now leveraging new identity-based filters to detect fraud. By changing the rules on the fraudsters and tackling the identity component of the problem, the federal government is making a great start towards shutting down tax refund fraudsters.

Source: Today’s ”Fraud of the Day” is based on an article entitled ”Identity Thieves Could Rake in $26 Billion in Tax Refunds” written by Scott Zamost and published by CNN.com, May 8, 2012.

Criminals who file fraudulent tax returns by stealing people’s identities could rake in an estimated $26 billion over the next five years because the IRS cannot keep up with the amount of the fraud, Treasury Inspector General J. Russell George said Tuesday.

“Our analysis found that, although the IRS detects and prevents a large number of fraudulent refunds based on false income documents, there is much fraud that it does not detect,” said George’s prepared testimony before a joint hearing of the House Ways and Means Subcommittees on Oversight and Social Security.

 

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Larry Benson
Larry Benson is currently the Director of Strategic Alliances for Revenue Discovery and Recovery at LexisNexis Risk Solutions. In this role, Benson is responsible for developing partnerships for the tax and revenue and child support enforcement verticals. He focuses on embedded companies that have a need for third-party analytics to enhance their current offerings.