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The many challenges with tax refund fraud detection

October 8, 2013 by Randy Boileau

Billions of dollars are being issued in fraudulent refunds at the state and federal level. Most of the fraud can be categorized around identity theft. An example of this type of fraud may include fraudsters acquiring the Personal Identifying Information (PII) from a deceased individual, buying it from someone not filing or otherwise stealing it from legitimate sources like a doctor’s office. The PII is then used to fill out tax returns, add fraudulent income information and request bogus deductions.

Additional forms of tax refund fraud may include:

  • Direct consumer tax refund fraud using real PII of US Citizens to file fraudulent tax returns and claim bogus deductions thereby increasing refund amounts
  • EITC (Earned Income Tax Credit)/ACC (Additional Childcare Credit) fraud which is usually perpetrated with the assistance of a tax preparer and claiming improper cash payments and/or deductions for non-existent children.
  • Tax Preparer Fraud where tax preparers purposefully submit false information on tax returns or file false returns for clients.
  • Under reporting of income on tax filings.
  • Taking multiple Homestead Exemptions for tax credit.
  • Since this Fraud more often occurs as an early filing using Fraudulent or stolen PII the individual consumer is at risk for long term Identity issues.

Exacerbating the tax refund fraud problem:

  1. The majority of returns that request refunds are now filed online (83% of all federal filings in 2012 were online) -if you file online, there is no need to submit a W-2 form with that online filing. If your employment information cannot be pulled into the forms by your tax software you can fill it in manually. The accuracy of information regarding employer and wage information for which deductions are based, is only verified after the refund is issued.
  2. Refunds directly deposited – filers now have the option to have their refunds deposited into a bank account for faster receipt. Once these funds are deposited and withdrawn there is no way to trace where the funds have gone.
  3. Refunds provided on debit cards – filers can request their refund in the form of a debit card. This is an even bigger problem than bank account deposits because once issued, there is no way to trace who uses a debit card and for what purpose.

So what do you need to look for when reviewing tax fraud prevention tools?

  • Look for a provider that has experience in working with state and federal government agencies. Proven expertise in this domain is critical, and experience here means that the provider has cleared the disciplined review process that the government requires for businesses they do business with.
  • Look for providers with relevant certifications for authentication services, such as the Kantara Identity Assurance Framework for levels of identity assurance.
  • Look for providers that can authenticate users by verifying the device they’re using to access your applications. With over 80% of tax filings occurring online, it is critical that any identity proofing strategy also allows for the capability to verify the source or device used to access these applications. Since tax fraudsters don’t limit their use of stolen IDs to tax fraud and may also use them to perpetrate other financial crimes such as opening lines of credit – you need to be looking at all avenues of fraudulent activity
  • If fraud is detected and stopped, consider using a provider that can offer post fraud mitigation processes for your customers/potential victims.

Getting tax refunds and other government benefits into the right hands of their recipients is important to everyone involved. Since tax refund fraud detection is a moving target, it’s buyer beware if you hitch your detection efforts to a provider that has not proven their expertise in this unique space.