Identity Theft Tax Refund Fraud: Everybody Is at Risk

By Michael Hoffmann, CFE October 2014 Fraudsters who use stolen personally identifiable information can perpetrate a wide variety of fraudulent financial schemes, such as hacking online accounts, submitting phony insurance claims, and applying for loans and credit cards to pad their bank accounts. Increasingly, though, identity theft tax refund fraud is becoming a favorite money-making scheme for criminals.

By Michael Hoffmann, CFE

October 2014

 

Fraudsters who use stolen personally identifiable information can perpetrate a wide variety of fraudulent financial schemes, such as hacking online accounts, submitting phony insurance claims, and applying for loans and credit cards to pad their bank accounts. Increasingly, though, identity theft tax refund fraud is becoming a favorite money-making scheme for criminals.

 

There have been many newsworthy stories in recent months of identity theft and how the information can be used against individuals. Because identity theft tax refund fraud has become the most popular tax scam around, you might even know someone who has been a victim of it. All that is needed is a computer (or even a cell phone with the necessary app) and someone’s Social Security number (SSN) and date of birth.

 

This fraud is so rampant that the U.S. Internal Revenue Service (IRS) estimates that it mistakenly paid $5.2 billion to identity thieves in 2013, according to a report by the Government Accountability Office (GAO). The fraudsters filed fraudulent tax returns on behalf of millions of unsuspecting taxpayers, and the IRS did not catch the scheme until well after the refund checks had been processed. However, the financial damage could have been far worse: The IRS also estimates that it was able to identify and stop $24.2 billion in attempted identity theft tax refund fraud last year.

 

Components of the Scam

Believe it or not, this fraud scheme is fairly easy to execute. Citizens usually receive a W2 tax form from their employers by the end of January each year. For the most part, taxpayers then file returns by April 15. During that window, fraudsters are able to steal individuals’ personal information, usually Social Security numbers, file fake returns as the victims and collect the refund checks. Because the IRS attempts to issue refunds within three weeks of receiving submitted tax returns, the scam happens quickly and painlessly for the fraudsters.

 

Moreover, employers have until March to send their formal W2s to the Social Security Administration (SSA), which eventually passes the documentation on to the IRS. The agency does not begin the uphill process of verifying tax returns against employers’ W2s until July, which only increases the fraudsters’ chances of getting away with the crime. The GAO has reported that it can take more than a year for the IRS to complete the necessary confirmations and discover the fraud.

 

Recent Incidences of Note

For decades, Florida has been the hotbed of fraudulent activity in the U.S. Medicare fraud, mortgage fraud, securities fraud and now tax frauds using stolen identities are plentiful throughout the region. For the third consecutive year, the state leads the nation in terms of identity theft complaints, and Miami is also No. 1 in terms of metropolitan areas that suffer from identity theft. However, Florida has some competition.

 

Recently in Georgia, two instances of identity theft tax refund fraud made headlines. A Cobb County man, Mauricio Warner, was sentenced to 20 years in federal prison for stealing the identities of thousands of people to file fraudulent tax returns that claimed more than $5 million in refunds, which he had the IRS deposit into various accounts. From January 2011 to April 2012, Warner filed more than 5,000 false returns using the identities of unsuspecting victims, but he was also ordered to pay full restitution to the government at sentencing. In addition, a Cobb County woman was arrested and accused of filing a tax refund worth more than $94 million. Brigitte Jackson, who reported $99 million in 2013 income, attempted to pick up her mega refund check at the local grocery store. She was apprehended after her repeated phone calls inquiring about her phony tax return were routed to financial fraud authorities.

 

In Pittsburgh, Penn., the scheme recently included an international angle. Five Nigerians were charged with using other individuals’ identities to claim bogus tax returns. The perpetrators used stolen personal information gathered off the Internet to open bank accounts, obtain credit cards and steal millions of dollars from the U.S. Treasury by filing fake returns. Over a 10-year period, the accused fraudsters accumulated more than $10 million in false tax returns before the scam was detected. The fraud was discovered when an employee at a nearby credit union recognized that application forms filed by the fraudsters contained similar stolen data.

 

Ways to Protect Your Identity

Although identity theft is difficult to completely guard against, there are steps you can take to make it challenging for fraudsters to steal personally identifiable information, including:

 

Regularly check your credit report.

 

Do not carry a Social Security card or any documentation containing your SSN.

 

Properly dispose of documentation containing sensitive information; shred it instead of leaving it in the trash.

 

Only give personal information when absolutely necessary — especially on websites and via social media — and keep track of those who have access to it (this might be helpful in determining the breach source if victimized).

 

Never use public Wi-Fi or a non-password-protected network to file electronically.

 

Protect personal laptops and devices by installing firewalls and the most recent anti-virus software.

 

File taxes as early as possible during tax season because criminals try to file fraudulent returns before the actual filer (once the IRS receives a return with an SSN, the agency will reject any duplicate filings and immediately notify you).

 

If filing taxes is not required, consider doing so anyway to prevent a criminal from submitting a false return in your name, and to be alerted if someone has already filed in your name.

 

Be leery of phone calls from people who already know your SSN and claim to be IRS agents. Some even manipulate caller ID. (The IRS warned of this sophistication last October.)

 

Even by following these tips, the threat remains and seems to be growing. In 2010, tax- and wage-related identity theft accounted for 16 percent of all identity-theft complaints made to the Federal Trade Commission. In 2013, they represented a whopping 43 percent.

 

Conclusion

Although identity theft paired with tax refund fraud is relatively new, its effects have been felt by millions of victims across the U.S. Even today, the IRS still cannot distinguish if the individual filing a tax return is the actual taxpayer or a fraudster. However, several controls are currently under consideration, including delaying refund payments until IRS agents can verify payouts with the W2s filed by employers. Also, the U.S. House of Representatives passed a bill last month that would toughen penalties for convicted fraudsters in an attempt to limit losses. The legislation would add tax return fraud to the category of aggravated identity theft, which would add five years to the maximum prison time per conviction. Considering this fraud has cost the U.S. Treasury nearly $21 billion in the last five years, fraudsters should be punished accordingly.