The many challenges with tax refund fraud detection

by Guest Contributor 3 min read October 8, 2013

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 Once these funds are deposited and withdrawn there is no way to trace where the funds have gone.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.

Related Posts

Cash Flow Insights: Powering the Next Evolution in Lending

For decades, credit data has given lenders a trusted foundation for assessing risk. Now, consumer-permissioned cash flow data is adding another layer of insight into consumers’ financial lives, including income, spending, liquidity and changing financial obligations. The opportunity is significant. Nearly one in five consumers lacks access to or has damaged credit. New Experian research also shows that 60% of consumers who have previously been denied credit or received less favorable terms than expected believe the outcome would have been different if lenders had considered their recent income and banking activity alongside their credit history. 1,2 For lenders, cash flow insights can provide additional context about a consumer’s financial capacity and support more informed underwriting decisions. The next challenge is making those insights easier to use consistently and responsibly at scale. What are cash flow insights? Cash flow insights are derived from consumer-permissioned banking data and provide visibility into how money moves into and out of a consumer’s accounts. Depending on the information available, cash flow data can provide insight into financial behaviors such as: Income and income stability: Regular and irregular income streams and changes over time Spending and recurring expenses: Everyday spending patterns and ongoing financial obligations Account balances and liquidity: Available funds and changes in account balances Debt obligations: Loan payments and other recurring debt commitments Cash flow patterns: How money moves into and out of accounts over time Traditional credit information provides a rich history of how consumers have managed credit. Cash flow insights add context about their current financial activity and capacity, providing lenders with a more complete view of financial health. Cash flow insights can also add predictive value to risk assessment. Experian analysis shows Cashflow Score can deliver up to a 25% lift in predictive performance over conventional credit scores when tailored to targeted risk tiers.3 How lenders can put cash flow insights to work at scale As interest in cash flow insights grows, the conversation is moving beyond what the data can reveal to how financial institutions can use it consistently and responsibly. That requires standardized consumer reporting, clear governance and decision-ready insights that can work within established lending processes. The launch of Experian Cashflow Data Bureau at Vision 2026 reflects this shift from access to adoption. The new consumer reporting agency operates under the Fair Credit Reporting Act (FCRA) and is designed to help financial institutions adopt consumer-permissioned cash flow insights at scale. A key part of that foundation is the cash flow consumer report, which organizes consumer-permissioned banking information into a standardized consumer report regulated under the FCRA. This gives lenders a consistent foundation for incorporating cash flow information into lending decisions while providing consumers with access to the information in their report. Turning greater visibility into better decisions The next evolution in credit isn’t about choosing between traditional credit and cash flow data. Each provides a different perspective. Traditional credit information offers deep insight into how consumers have managed credit over time. Cash flow insights can add context about financial activity and capacity. Bringing those perspectives together can give lenders greater visibility into consumers’ financial health and help them better distinguish between risk and resilience, support more informed decisions and identify opportunities to responsibly expand access to credit. As cash flow adoption continues to grow, its value will come from how effectively it complements the information lenders already use. The opportunity isn't simply to see more data. It's to turn that additional visibility into smarter, more informed decisions. Explore how Experian Cashflow Data Bureau is helping financial institutions put consumer-permissioned cash flow insights into practice at scale. Learn more [1] Federal Reserve Bank of New York, The Market for Credit Building: Demand, Product Characteristics and Consumer Uses, 2026. [2] Experian commissioned Atomik Research to conduct an online survey of 2,000 U.S. adults age 18+. Fieldwork took place July 16–21, 2026. Margin of error: +/- 2.2 percentage points at a 95% confidence level. [3] Based on Experian analysis when Cashflow Score is compared with conventional credit scores, tailored to targeted risk tiers. Predictability based on KS.

October 14, 2026 by Julie Lee
The Three Onboarding Fraud Pain Points That Slow Growth (And How to Solve Them) 

Effective fraud prevention is critical to balancing security and customer experience during onboarding. Learn more!

October 12, 2026 by Charles Hunter
How Rental Data Is Expanding Financial Opportunity for Millions of Renters 

Discover how rental payment reporting can expand credit access, strengthen credit profiles and improve risk assessment for renters and housing providers.

October 8, 2026 by Manjit Sohal

Subscribe to our Newsletter

Enter your name and email for the latest updates.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Subscribe to our Newsletter

Don't miss out on the latest industry trends and insights!
Subscribe