Tax refund fraud is serious business. In 2016 alone, tax refund fraud is expected to escalate to $21 billion. In the past four years, the IRS blocked about $62 billion worth of fraudulent tax returns, says Geno Salo, senior director, Government and Regulatory, at Thomson Reuters.
The Federal Trade Commission (FTC) estimates that as many as 9 million Americans have their identities stolen each year, and tax refund fraud—filing a tax return under someone else’s name in order to collect a tax refund—was the most common form of identity theft for the past five years. “There’s been a marked uptick in the amount of fraudulent activity in the tax arena,” Salo says.
To address this concern, IRS Commissioner John Koskinen held a summit in March 2015 to bring together key players in the tax industry, including Jon Baron, managing director for the Professional Tax & Accounting business of Thomson Reuters. During the summit, participants developed three areas of focus for combatting tax refund fraud.
- Authentication: Develop strategies to strengthen authentication practices, including identifying new ways to validate taxpayers and tax return information.
- Information Sharing: Identify opportunities for sharing information that will improve capabilities for detecting and preventing tax refund fraud.
- Strategic Threat Assessment and Response: Enable long-term development of proactive initiatives and solutions to combat tax refund fraud.
Across the profession, the consensus is that a multi-faceted, coordinated approach is essential to combat the ever-evolving methods thieves use to target taxpayers.
“It’s like a game of leapfrog,” Salo says. “While the IRS and the industry get better at preventing fraud, the criminals are also trying to get better at breaching our systems.”
New Weapons Against Fraud
The IRS has added more than 20 new data elements to help authenticate taxpayer and tax return information. Now, the IRS is going to require software providers to adhere to certain authentication standards to minimize criminals’ ability to take over an individual’s account. Software providers are also being asked to work with the IRS in spotting new identity theft trends.
“We don’t want to give away too many details that could tip off the criminals,” he says, “but both GoSystem Tax RS and UltraTax CS are working with the IRS on methods to help spot fraudulent trends in tax returns.”
Other fraud prevention strategies are being implemented across the profession. One major issue is that the IRS usually doesn’t receive employers’ wage information until late spring—much later than employees do. That means millions of refunds are distributed before the IRS can check a return’s wage figures against employer data.
“The game needs to be changed just a little bit to get information on returns that we can check in real time,” Salo says. “It’s in the hands of Congress, but the goal is to speed up W-2 reporting—hopefully in the next couple of years.”
Another idea is to increase the use of the IRS’ Identity Protection Personal Identification Number (IP PIN), which might reduce reliance on Social Security numbers as a taxpayer ID.
In addition to government and industry efforts to protect against tax return fraud, tax and accounting professionals have a responsibility, too. According to Salo, many data breaches happen because criminals have enough information about someone’s identity to access a previous year’s tax return, so they can get past the authentication questions.
“It’s things like keeping your data on a laptop or a thumb drive that can be stolen that everyone needs to be vigilant about, along with keeping up security protocols and antivirus software,” Salo says. “For clients that use Thomson Reuters for their data storage, we have high levels of security in place.”
But the work to fight tax return fraud will never be finished. Thomson Reuters will constantly make adjustments to technology and processes to stay one step ahead of the criminals.
“This is a long-term situation we’re in,” Salo says. “As technology changes, as new schemes are invented, everybody needs to stay on top of it and realize that the rules are going to change to keep everyone’s information safe.”
To learn more about tax refund fraud resources available from the IRS, visit irs.gov/Individuals/Identity-Theft-Information-for-Tax-Preparers.
5 Steps for Tax Refund Fraud Victims
Victims of tax refund fraud should take these actions immediately:
- Contact the IRS as soon as possible.
- Complete IRS Form 14039.
- File a police report.
- File a complaint with the Federal Trade Commission (FTC).
- Contact one or more of the three major credit bureaus to request a credit report and put a hold on new credit requests.