The Fraud Examiner

Is Your Refund at Risk?

March 2013

By Catherine Lofland, CPA


The clock is ticking to file 2012 income tax returns in the U.S., and if you haven’t filed yours yet, you might not want to wait around too much longer. Filers have bigger things to worry about than whether they’ve maximized their refund; specifically, the threat of someone stealing their identity and filing their tax return before they do. If you do fall victim to such a scheme, your refund could be delayed for six months or more — plus the time spent trying to convince the Internal Revenue Service (IRS) that you are who you say you are.


Tax refund identity fraud is a significant issue facing taxpayers today, thanks to the ever-increasing availability of personal information. For fiscal year 2012, the IRS’s identity theft unit received 78 percent more complaints than in 2011. According to a 2012 report from the Treasury Inspector General for Tax Administration (TIGTA), potentially fraudulent tax refunds issued totaled in excess of $5.2 billion during the 2011 filing season. TIGTA arrived at this figure by identifying approximately 1.5 million returns that the IRS failed to detect as fraudulent, but that had the same characteristics as returns confirmed as filed by identity thieves.


There are several reasons that the IRS failed to detect so many fraudulent returns. First of all, the agency is understaffed due to budget cuts. Secondly, crooks continue to get better at making fraudulent returns appear legitimate, especially with the popularity of electronic filing. And finally, the agency is under a great deal of pressure to process returns as quickly as possible. The goal for the 2012 filing season is to deliver 90 percent of refunds within 21 days. Since the IRS processes over 140 million tax returns each year, detecting fraudulent returns while also issuing prompt refunds is a tall order.


The good news is that the IRS has strengthened its identity theft prevention processes (referred to as filters) for the 2012 filing season, making its automated systems more sensitive to signs of fraud. These filters flag returns that meet certain suspicious criteria so that agents can determine whether they warrant further investigation. Furthermore, the IRS also issues Identity Protection Personal Identification Numbers to victims to protect future filings.


Fraudsters exploit the fact that the IRS doesn’t process W-2s and 1099s it gets for taxpayers until after it pays out refunds. Therefore, an ID thief in possession of a name and Social Security number (SSN) can create a fictitious W-2 and apply for a refund using phony income and withholding numbers, or claim credits such as the child tax credit, as long as they are the first to file using that particular SSN.


How Do They Steal Your Information? 

Identity thieves employ an array of tactics to steal your personal information. If someone has access to your name, SSN, and birth date, they can probably file your tax return for you and easily pocket the refund by asking the IRS to load it onto a debit card.

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