With the number of federal income tax returns filed electronically increasing each year, criminals are becoming more organized as they look for ways to steal the identity of taxpayers and then use those identifies to take the tax refunds the individuals are owed.
Although stealing a person’s identity and then using that stolen identify to obtain that person’s income tax refund is nothing new, the problem is growing each year despite the best efforts of government’s efforts to respond to the crime.
Over 80% of tax returns filed in 2012 were filed electronically, which gives criminals a large pool of returns to pursue. And petty thieves are not the ones carrying out such crimes. Rather, security experts and government officials alike confirm the crimes have mafia ties.
Part of the problem in combating the theft of tax refunds lies with the federal income tax filing system itself. Many software applications used to process and return refunds are old, and the security used to protect these systems is likewise in need of updating. These systems simply cannot withstand all of the sustained attacks of organized criminals, who man employee thousands of workers at any given time.
In addition, the process the IRS utilizes to issue a refund is flawed in that refunds are often mailed before a given return undergoes a thorough audit. By the time the IRS detects many fraudulent returns the money is already gone and the temporary address used for the return has been abandoned.
“They’re getting better at it but they still have so many hundreds of millions of tax returns to file in so short a time,” noted Robert Siciliano, a security expert with McAfee, in reference to the IRS’ attempts to improve their security and fraud detection processes. “It’s an old, dilapidated mess of a system that has not kept up with the times.”
In January 2013, the IRS completed a 12-month effort to specifically target identity thieves who were seeking to steal tax refunds. Almost 400 suspects were pursued in the effort, leading to the arrest and indictment of hundreds of individuals. All told, the IRS and Department of Justice combined have investigated almost 1,500 cases of identity theft since the last quarter of 2011.
“We have aggressively stepped up our efforts to pursue and prevent refund fraud and identity theft, and we will continue to intensely focus on this area,” noted Steven Miller of the IRS Acting Commissions.
However, the Treasury Inspector General for Tax Administration estimates that for the 2011 tax year over 1.5 million fraudulent tax returns were accepted, with a payout of over $5 billion in fraudulent refunds. Even though the IRS detected and stopped the payout of over $6 million in fraudulent refunds related to nearly 1 million bogus tax returns, the amount of money bled from the system is still very significant.
Cyber criminals see such a large amount of success because they are filing the fraudulent tax returns using legitimate social security numbers. Many of these numbers are obtained because the individuals use lax security in their personal lives, failing to shred sensitive documents thrown into the garbage or not using up-to-date security software on their personal computers.
There are a few things an individual can do to protect themselves from becoming the victim of tax refund fraud. First, remember the IRS never communicates with individuals using e-mail. Such messages purporting to be from the IRS often have alarming subject lines indicating your tax refund has been denied and you must click a link in the e-mail to get more information. However, clicking the link can take you to a web site specifically designed to place a virus on your computer, which the criminal can then use to capture your personal information.
Individuals can also consider using locking mailboxes, so that it is harder for thieves to steal mail you have received that contains personal information, and using a shredder on any documents with personal information you plan to throw away. In addition, every individual should check their credit report at least once a year, if not make use of a credit alert system that notifies you immediately when activity occurs using your credit.
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.