Tax identity fraud is a multibillion dollar industry for criminals. ESET’s Lysa Myers explores new measures and offers some top tips on how to tackle this menace.
For many Americans, tax season is a time of confusion and dread. Even if you’ve managed to gather all your paperwork in a timely fashion and are owed a refund, this may not be the end of your anxiety. Tax identity fraud is a multibillion dollar industry for criminals who try to use your Social Security Number to file a bogus tax return that results in them receiving a refund in your name. To combat this, the Internal Revenue Service (IRS) has begun rolling out new initiatives to help verify taxpayer identities and data.
The first such measure is called the Identity Protection PIN, which is a six-digit number that is sent by the government to taxpayers each year, and which must be correctly entered on tax forms in order for the return to be accepted. So far this initiative has been rolled out in Florida, Georgia, and the District of Columbia as an early test of the authentication measure’s effectiveness. These three states were likely chosen because tax scammers frequently target government and military personnel, as well as older adults.
The second initiative is intended to help verify the authenticity of Form W-2 data with a sixteen-digit alphanumeric code. The IRS is partnering with payroll service providers to roll this out. Adoption is happening at an increasing pace: it was included on 2 million W-2 forms in 2016 and 50 million in 2017. This verification number is not yet mandatory, and your return will not be delayed due to the absence of this number. Though this is likely to change in the near future.
There is some indication that these initiatives, coupled with the IRS’ own internal fraud detection initiatives, are decreasing the number of fraudulent refunds paid out each year. Last year, 34% of the identity theft complaints to the Federal Trade Commission (FTC) concerned taxes, employment, or wages, falling from 45% in 2015. Total identity theft complaints to the FTC also were down, dropping to 399,225 in 2016, from 490,220 in 2015. These numbers are still higher than those from 2014, but it indicates a general downward trend. This is forcing scammers to adopt other methods of targeting taxpayers.
The nature of tax identity fraud
To say that tax identity fraud is rampant in America would be an understatement. According to the most recent Government Accountability Office (GAO) report, in 2013, crooks took $5.8 billion from the US Treasury through tax ID fraud.
The IRS publishes a dossier of tax ID fraud cases it prosecuted in 2016, listing details of the fraud committed. It makes for pretty depressing reading despite the fact that, on the bright side, many criminals were convicted. Sadly, convictions are not a strong enough deterrent for some people. While the main target has been the federal income tax refund, last year saw an increase in this type of crime targeting state tax authorities (many US states have their own income tax, in addition to the federal tax).
You can get a good sense of the scale and nature of tax identity fraud from this 60 Minutes segment, available as a transcript (plus video in some regions of the planet). To get the perpetrator’s perspective, consider this statement from Corey Williams, who was a legitimate tax preparer until his boss turned him on to the scam (before he was arrested and sentenced to 40 months in prison, Williams had raked in millions of dollars in fraudulent refund payments):
“Anybody who knew about it, you’d be a fool to not try to get involved with making some money. I could wake up in the comfort of my own home, and just get on a laptop, do about 15 returns a day. Fifteen times $3,000 a return, that’s $45,000 a day.”
So it’s no surprise that tax identity fraud is a flourishing industry. The perpetrators even have online support groups – as described by Brian Krebs last year – in which to share tactics. On the plus side, the IRS is getting better at spotting the most flagrant abuses. A report on a previous year’s filing season found the IRS identified 163,087 tax returns with more than $908.3 million claimed in fraudulent refunds, blocking approximately $787 million (86.6%) in fraudulent refund payments.
Unfortunately, these anti-fraud efforts have led some scammers to adopt more aggressive tax-based cons, including threatening phone calls. Fortunately, America’s consumer watchdog, the Federal Trade Commission (FTC) has taken a leading role in educating the public about tax identity theft and other IRS-related scams. Its website has lots of resources for Tax Identity Theft Awareness Week.
Tax ID theft: what could go wrong …
- Your return is rejected: If you find that another a tax return has been filed with your Social Security number, you should use IRS Form 14039 to alert the IRS. Do this right away. You will need to provide information about the tax year affected and a copy of the last return you filed prior to the identity theft. After you have filed this form, keep calling the IRS for updates on a regular basis to prevent your case from slipping through the cracks. In some situations, the IRS will issue a taxpayer-specific PIN if you have had issues with identity theft. This PIN is then required on any tax return you file. Go to this page on the IRS website to learn more about the process of applying for a tax return PIN from the IRS.
- You are asked to return a refund: This can occur if you are the victim of a different type of scam, as previously reported in the Wall Street Journal, in which a more skilled criminal uses routing information from a victim’s personal check. The criminal will “trick the electronic tax-payment system into transferring funds from a victim’s bank account as an estimated-tax payment to another stolen name and Social Security number, then file a refund claim transferring the stolen funds to his own account”. (See “ACH debit block” below as a means of defeating this scam.)
- You are accused of under-reporting income: You could potentially be contacted by the IRS for not reporting income when in fact you did not earn that income. This happens when someone else gives your Social Security Number to an employer; that person’s wages are reported to the IRS in your name; when the IRS notices you did not include them on your return, you get flagged. If this happens, do not panic, simply explain what happened. Remember, you are not the only person to which this has happened, and the IRS agent will have encountered this problem before. (In my experience, IRS agents are very reasonable, they simply want to get the facts straight.)
- You are turned down for a loan: You could find yourself turned down for a loan because of discrepancies between your tax record and those that the IRS maintains. For example, even if you earn a six figure annual salary, someone can file a fake return in your name showing you make less than $40,000 and still get themselves a $3,000 refund (tax ID scammers tend to keep the claims under $4,000 and make the big money through volume).
How to protect yourself
Unfortunately, there is a limit to what consumers and small businesses can do right now to prevent tax identity fraud. One thing all Americans can all do is lobby congress to clean up this mess. After all, if the IRS did not choose to issue refunds before employer W-2 data was processed – no responsible accountant would voluntarily do such a thing – the current situation exists because of various congressional edicts.
In addition, here are a few defensive measures one can take.
Protect your Social Security Number
Do not disclose your SSN unless absolutely necessary. For example, avoid using your Social as an account identifier when using medical services (you have the right to demand an account identifier number instead, one exception being Medicare and Medicaid patients). Your Social is the prime ingredient for tax identity fraud and you don’t want to make it easy for the bad guys by being careless with this information.
Order your IRS transcript
This allows you to see what the IRS has on record for you in terms of tax payments and refunds. Contrary to popular myth, the IRS does not play poker with your data, they are quite happy to share with you the data they are holding that relates to you. Just Google “IRS transcript” and you can find how to do this at irs.gov. If you use a reputable accounting service, they should be happy to get your transcript for you (the IRS will verify this request with you).
File your returns early
This is not always feasible, but the thinking is that it limits the opportunity for fraud in the current filing period. However, this will not stop estimated tax fraud where a criminal uses your bank account number and bank routing number to make an estimated tax payment to the IRS on behalf of a stolen name and Social Security Number, then claims a refund which the IRS pays to an account under the control of the scammer.
Monitor your bank accounts
Always a good idea when there are so many people trying to get away with bogus charges these days. Try to review account transactions at least once a week and immediately alert your bank when you see something that you didn’t authorize. Many banks have alert services that will email or text you every time money is taken out of your account, a great way to stay on guard against fraud.
Ask your bank about an ACH debit block
Putting an ACH debit block on your account prevents crooks taking money with this type of transfer. However, it could prevent you executing legitimate online or over-the-phone electronic payments.
Lobby for change
Yes, I mentioned this before, but it is worth repeating. And it is not as hard as you might think – you can even get apps for this. Consider the “Congress” app from the nonpartisan Sunlight Foundation, which is free and comes in iOS and Android versions. It can find your representative and let you place a call to their office with just a few clicks.