Identity theft tax refund fraud
A growing epidemic, part 1 of 2
The U.S. Internal Revenue Service calls the
scam its No. 1 fraud. Identity thieves are using stolen personally
identifiable information to file victims’ tax returns and then receive
their refunds. Here’s how they do it and ways to combat and prevent it.
Winston, who held an MBA degree from Harvard University, was a very
successful broker for a large firm on Wall Street. With tax time
approaching, she gave her records and receipts to her longtime tax
specialist to ensure she would comply with the income tax code when she
filed her return.
Normally, she would receive a refund. But this
time the Internal Revenue Service (IRS) sent her a notice stating that
“More than one tax return for you was filed” and informing her that it
had already issued a refund check in her name. After she spoke with her
tax professional and an IRS agent, she realized that she was the victim
of an identity theft tax refund scam.
ANATOMY OF SCAM
tale of woe is fictitious, but it’s indicative of an alarming problem.
J. Russell George, U.S. treasury inspector general for tax
administration, said that tax refund identity theft is a “growing
epidemic,” according to a Nov. 7, 2013, Reuters article. George said
that more Americans’ identities were stolen in tax refund crimes in the
first six months of 2013 than in all of 2012. (See “Tax refund ID theft is growing ‘epidemic’: U.S. IRS watchdog,” by Patrick Temple-West.)
The IRS ranked identity theft tax refund fraud as its No. 1 scam last year. (See “IRS Releases the Dirty Dozen Tax Scams for 2013.”)
According to the IRS document, “Taxpayer Guide to Identity Theft,”
an identity theft tax refund scam “occurs when someone uses your
personal [identifying] information [PII] such as your name, Social
Security number [SSN] or other identifying information, without your
permission, to commit fraud or other crimes.” The scam usually occurs
when “an identity thief uses a legitimate taxpayer’s identity to file a
fraudulent tax return and claim a refund. Generally, the identity thief
will use a stolen SSN to file a forged tax return and attempt to get a
fraudulent refund early in the filing season.” By filing the fraudulent
tax return early, of course, the identity thief usually receives the
refund before the victim sends his or her tax return, and the IRS
Thanks to paperless e-filing, this scam is easier
to pull off than ever before. Thieves can simply make up phony wages or
other income, submit the information electronically and receive the
fraudulent refund via mail or direct deposit within a month. Of course,
the IRS keeps records of earned wages and other types of taxable income
reported by taxpayers’ employers and other organizations. However, the
IRS doesn’t match these records to information submitted electronically
by identity thieves until several months after it issues refund checks.
By the time the IRS tells the victim that it has received another tax
form in his or her name, the thief has cashed the refund check and is
long gone with the money. The identity thief wins, and the U.S. Treasury
and the victimized taxpayer are the losers.
CONSEQUENCES FOR VICTIMS
will happen if a fraudster uses your PII to commit this crime? Well, to
begin with, you probably won’t receive your tax refund within the
normal time period. (See “Identity theft and the IRS, or, Who got my refund?”
by Linda Stern, Reuters, March 13, 2013.) You’ll first need to go
through the process of confirming your identity with the IRS to collect
According to a Nov. 7, 2013, report by the Treasury
Inspector General for Tax Administration (TIGTA), the IRS took an
average of 312 days to resolve tax-related theft cases
closed between August 2011 and July 2012. The report shows that the
government was still losing $3.6 billion a year in potentially
fraudulent tax refunds. That’s down from the $5.2 billion in potentially
fraudulent refunds that the IRS issued in 2011.
In conjunction with the release of the TIGTA reports, Sen. Bill Nelson, D-Fla., renewed his “call for an increased government crackdown
on identity thieves who use someone else’s name to steal their tax
refunds.” Nelson re-filed his legislation, the Identity Theft and Tax
Fraud Prevention Act of 2013 (S. 676) in April 2013, which would toughen
criminal penalties for ID thieves who file fake refunds under someone
else’s name. It would also require the IRS to get legitimate taxpayers
the refunds they’re due within 90 days. That would certainly provide
some relief to financially strapped victims.
reports show that some progress is being made in reducing tax fraud,
it’s also clear that there is still much to be done and there are still a
number of improvements that need to be made to protect both taxpayers
and the U.S. Treasury,” Nelson wrote in a Nov. 7, 2013, letter to Sen.
Max Baucus, D-Mont., chairman of the Senate Finance Committee
encouraging him to prioritize Nelson’s bill.
Don’t get your
hopes up because, as we will explain later, this process will most
likely take a long, long time. (As of press time, govtrack.us predicted Nelson’s bill had a zero percent chance of Congress enacting it.)
scam’s consequences don’t end when you travel through the process of
confirming your identity with the IRS and receive your refund. After
all, someone has stolen your identity and your PII is good for more than
just filling out a tax form. Identity thieves may also use it to obtain
credit/debit cards in your name, take out loans or mortgages, get jobs
or even declare bankruptcy.
odds are very high that an identity thief won’t pay off any debts they
incur in your name, which will leave you holding the bag while the
fraudster skips off into the sunset with his (your!) loot — free and
clear. He can destroy your credit rating and make it difficult or
impossible for you to negotiate the economic seas. You’ll spend hours
and hours clearing your record and lots of cash if you need to hire an
attorney to help.
FINANCIAL IMPACT OF THE SCAM
For the tax return
processing year of 2011 (per the tax year 2010 tax returns), the IRS
reported 938,664 cases of identity theft tax refund fraud, with
approximately $6.5 billion in fraudulent tax refunds issued. In TIGTA’s
analysis of the same data, the agency estimated that approximately 1.5
million additional individual tax returns filed in 2011 met the
characteristics of confirmed IRS identity theft cases, and these returns
accounted for additional losses estimated to be more than $5.2 billion.
The TIGTA projected that tax identity theft fraud will account for
losses of approximately $21 billion over the next five years. (See the July 19, 2012, TIGTA report.)
projection appears to have some validity because the IRS mailed out $4
billion in refund checks to identity thieves in 2013, which represents
1.6 million victims identified through June 1, 2013, according to the
TIGTA. In 2012, the IRS issued 1.1 million refunds to people using
stolen SSNs, which resulted in fraudulent tax refunds of $3.6 billion.
This compares to 2011 when the IRS issued $5.2 billion in refunds to
people who stole SSNs. In addition, according to a Sept. 20, 2013, TIGTA
report, the IRS issued 141,000 refunds totaling $385 million
in 2012 to people using stolen taxpayer identification numbers, which
foreign citizens, who earn money in the U.S., typically use.
In its study of the 1.5 million additional tax returns noted above for the 2011 tax- processing year, the TIGTA identified five addresses that accounted for 4,864 fraudulent tax returns
and $8,104,493 in tax refunds. One address was located in Lansing,
Mich., where there were 2,137 fraudulent tax returns representing
$3,316,051 in refunds and the others in Chicago, Ill., (765 and
$903,084), Belle Glade, Fla., (741 and $1,104,897), Orlando, Fla., (703
and $1,088,691) and Tampa, Fla. (518 and $1,791,770).
same study for the 2011 tax processing year, the TIGIA also identified
the top five cities from where a total of 239,631 potentially fraudulent
tax returns were filed, accounting for $972,408,700 in fraudulent tax
refunds. The cities included: Tampa, Fla., with 88,724 tax returns and
$468,382,079 in fraudulent refunds; Miami, Fla., (74,496 and
$280,509,449); Atlanta, Ga., (29,787 and $77,113,392); Detroit, Mich.,
(23,870 and $74,313,933) and Houston, Texas (22,754 and $772,089,847).
(Florida cities are a big target for identity thieves because of the
relatively larger population of elderly people in that state.)
addition, the IRS sent a total of 655 tax refunds to a single address
in Lithuania, and 343 refunds went to a lone address in Shanghai,
according to the ITGTA report for the 2011 tax-processing year.
included in the TIGTA study noted above were categories for the types
of individuals whose identities appear to have been stolen, including
individuals who weren’t normally required to file a tax return. These
categories accounted for 1,492,215 tax returns with estimated refund
losses totaling $5,221,018,184.
The five categories included the
deceased with 104,950 fraudulent tax returns and $415,047,568 in
refunds, followed by the elderly (76,388 and $374,419,730), citizens of
U.S. possessions (76,338 and $374,419,730), students, ages 16 to 20
(252,288 and $695,043,022), children under the age of 14 (2,274 and
$3,960,327), and those whose income level doesn’t require tax return
filing (952,612 and $3,345,064,109). It’s obvious from these stats that
the elderly, students and young children are easy identity theft targets
because many of them don’t meet the income requirements to file a
federal tax return.
According to the 2013 TIGTA report cited
above “the IRS continues to increase its efforts to identify and prevent
fraudulent tax refunds from being issued as a result of identity
theft.” The report mentions that during 2012, the IRS prevented the issuance of $20 billion of fraudulent refunds,
including $8 billion related to identity theft, compared with $14
billion in 2011. The IRS says it stopped more than $12 billion in
fraudulent refunds from going to identity thieves in 2013. Hopefully the
IRS’ efforts will result in even better future results.
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