Tax agencies contend with soaring refund scams

Income tax agencies are developing new solutions and technologies to deal with increasing identity thefts and fraudulently claimed refunds.  Among the improvements being considered are IP address verification, stronger passwords on state tax websites, and better information sharing across states.  The IRS has also been providing PINs to taxpayers upon request which will reduce the likelihood that an identity thief could claim somebody else's refund without that PIN.  Government Technology magazine reports:

It’s Tax Season, and States Are Battling Bogus Requests for Refunds

Tax fraud costs state treasuries millions of dollars.

This tax season, states are employing new strategies to combat online tax fraud. Last year during tax season, Utah discovered that about 8,000 state income tax returns were filed with fake IDs, which could have cost the state $11 million in bogus refunds. The fraud discovery precipitated a weekslong halt to processing taxpayers’ returns and an intense investigation that stopped all but $17,000 in false refunds.

The scam sought to take advantage of the consumer-friendly service used by Utah and many other states of sending taxpayers their refunds quickly via pre-paid debit cards that could immediately — and untraceably — be used like cash.

No more, say Utah and the other 40 states and the District of Columbia that require taxpayers to file state or local income tax returns. This year, they are working together with the IRS and the largest private tax software companies to try to discover and stop the online filing fraud quickly — sometimes before it starts — by doing a better job of verifying the identity of the filers, strengthening password protocols and sharing information on filings that use stolen identities.

IRS Launches Campaign to Curb Tax Fraud

The dollar stakes are high in combating the cyber fraud. The IRS lost an estimated $5.8 billion to paying out fraudulent federal refunds in 2013 alone. And states are defrauded by an estimated $8 billion to $9 billion annually, said Haywood Talcove, CEO of Government and LexisNexis Special Services Inc., which works with many states to counter the scams.

The fight against tax fraud is a “battle that seems to grow every day,” IRS Commissioner John Koskinen told state, federal and private industry tax leaders in June. “The threat from fraudsters and criminals is complex and evolving.”

It Starts With Identity Theft

Crooks use various scams to file phony tax returns, but most rely on stealing a taxpayer’s identity.

They obtain a name and Social Security number from an unsuspecting taxpayer. That information can come from a doctor’s office, insurance company, school or any other entity that routinely collects names and numbers.

Then, they do a little Web searching to determine where the person worked, and approximately what their wages were. Armed with that, the scammer files a tax return, often exaggerating the number of deductions or businesses “losses” to generate a large and swift refund.

The scammers provide a phony address to send the refund and voilà! extra cash. Using algorithms and sophisticated, fast computers, the scammers can handle many phony returns in one state or many.

Often, the refund fraud is organized and highly sophisticated, says LexisNexis. #New Precautions

The Federation of Tax Administrators, a nonprofit that represents state tax administrators, began a “security summit” last spring with officials from all the states with income taxes and the IRS. From it came guidelines and recommendations for states and the IRS to help combat fraud, including extra security procedures. Among them:

• Strengthen procedures to authenticate the identities of taxpayers so that when returns are filed, the filer’s claims can be compared to the actual taxpayers. That includes verifying the Internet Protocol address from which a return was filed, and monitoring how long it takes someone to prepare and file a return — scammers do it quickly. (“The bad guys are first, and the good guys are last,” said Richard Ainsworth, director of the Graduate Tax Program at the Boston University School of Law.)
• Institute more secure online password standards for the IRS and the states, including eight characters with uppercase, lowercase, alpha, numerical and special characters; a new timed lockout feature for unsuccessful logins; and a requirement that taxpayers answer three security questions when they log in to their account.
• And simply share information between the states when fraudulent filings are spotted...