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Tax refund fraud throws a curveball to filers

The old adage ìthe check is in the mailî could hold true for some Colorado taxpayers this year, even those who requested direct deposit for state income tax refunds. On Feb. 27, the Colorado Department of Revenue announced it would issue paper checks instead of direct deposit for some state income tax refunds, as a measure to combat tax refund fraud.Ro Silva, spokeswoman for the Colorado Department of Revenue, wrote in an email, ìMaking this change is intended to prevent criminals from easily diverting fraudulent refunds to their own prepaid, re-loadable cards or debit cards.î Receiving a paper check does not necessarily mean a taxpayerís identity has been compromised. If the DoR suspects a fraudulent filing, it will send a letter to the taxpayer.Tax refund fraud as a result of identity theft continues to grow in the digital age. Electronic filing options have made it easier for scammers to file fraudulent federal and state tax returns and abscond with refunds. This type of fraud affects individuals, as well as taxpayers who foot the bill for billions of dollars in losses each year. In 2013, the Internal Revenue Service issued an estimated $5.8 billion in fraudulent refunds, according to the U.S. Government Accountability Office.Stolen information leads to stolen refundsAs reported in an article (ìHacked! The growing problem of credit and debit card fraudî) in The New Falcon Herald in February, data thieves use a variety of methods to illicitly obtain personal information. With social security numbers, names and addresses in hand, fraudsters create and file false tax returns, funneling refunds to their own bank accounts or to prepaid debit cards.Karen Connelly, IRS spokeswoman, said the agency is not always able to identify how personal information is stolen. ìItís an ongoing problem, and the thieves seem to get more cunning every year,î she said. ìOnce (a method) stops working, theyíll try something else.îAccording to a January 2015 GAO report, criminals are able to exploit IRS processes because the agency issues refunds after a cursory check of selected information, instead of holding refunds until all information is verified. Because taxpayers expect quick refunds, the IRS issues them before matching tax returns to third-party information such as W-2 data, which employers often submit late in the tax filing season.Victimized taxpayers might not know their personal information was used until they receive notice that tax returns have already been filed in their names. Connelly said, ìOften the first time someone becomes aware that their information has been stolen or compromised is when they file their return.îAccording to the IRS website, other tip-offs to tax-related identity theft include the following:

  • A taxpayer owes additional tax, has a refund offset, or is subjected to collection actions for a year in which a tax return was not filed
  • IRS records indicate the taxpayer received more wages than were actually earned, or received wages from an unknown employer
  • State or federal benefits are cancelled because the IRS received information reporting an income change
Security of systems and softwareHave IRS systems ever been breached? Connelly emphatically answered, ìNo; never.î Likewise, Silva wrote, ìColorado Department of Revenue accounting systems and the Department’s free e-file service Revenue Online have not been compromised. The cases we are investigating are cases of persons trying to commit refund fraud using information they have obtained through other means.îIn February 2015, the FBI began an investigation after 19 states, including Colorado, detected a surge of suspicious returns filed using TurboTax software. Intuit, the maker of TurboTax, temporarily suspended state tax return filings, as it investigated the problem with the help of a third-party security firm. According to an Intuit Feb. 6 press release, the suspicious activity ìdid not result from a security breach of its systems and that the information used to file fraudulent returns was obtained from other sources outside the tax preparation process.îH&R Block issued a press release the same day: ìWe have no indication this issue exists with H&R Block online state returns.îCombating tax refund fraudConnelly declined to speculate on any potential policy or procedural changes the IRS might be considering, but she said the agency has improved filters and instituted other methods to combat tax fraud and identity theft. A January 2015 IRS press release reported the agencyís ìaggressiveî efforts have stopped 19 million suspicious returns and protected more than $63 billion in fraudulent refunds from 2011 through October 2014. During filing year 2013 alone, the IRS prevented or recovered $24.2 billion in fraudulent refunds related to 4.1 million returns.Prosecutions of people who steal identities and refunds are also on the rise. In fiscal year 2014, the IRS initiated 1,063 criminal investigations related to identity theft tax fraud, down from 1,492 in 2013; but still more than three times the number of investigations opened in 2011. In 2014, 748 jail sentences were doled out for this type of fraud, up from 438 in 2013.At the state level, Silva said the Colorado Department of Revenue fraud detection efforts had identified 369 fraudulent filings as of March 20 ó 55 of those were discovered through the process of converting direct-deposit refunds, which were supposed to be downloaded to debit cards, into paper checks.Connelly said IRS commissioners met with representatives from the tax industry March 19 to share ideas on tackling fraud. According to the Wall Street Journal, IRS Commissioner John Koskinen announced at a press conference following the meeting that three groups would be set up to enact changes before next yearís filing season.Taxpayers can helpIndividuals must continue to protect their information as best they can, especially Social Security numbers and individual taxpayer identification numbers. ìBe really vigilant about your personal information,î Connelly said. She suggested that people avoid carrying social security cards in their wallets and secure personal and financial information that are stored at home, especially when visitors or workers are expected.Other tips from
  • Donít provide a Social Security number or individual taxpayer identification number just because someone asks for it. Give it only when required.
  • Check credit reports annually.
  • Carefully review Social Security Administration earnings statements annually.
  • Protect personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
  • Never give out personal information to anyone who solicits it by phone, email or text.
  • Beware of telephone, email and social media scams involving someone who claims to be from the IRS. The IRS will not initiate contact with taxpayers by telephone, email, text messages or social media accounts. Agents will never call to demand immediate payment for taxes owed, demand payment without providing an opportunity to question or appeal the amount owed, require payment by prepaid debit card, ask for credit or debit card numbers over the phone or threaten arrest by local law enforcement.

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