Despite increased efforts by the IRS to catch fraudulent tax returns, the growth in electronic filing has produced a tidal wave of phony philings during the 2015 tax season.
I had a number of unpleasant surprises while doing my taxes this year. (Has anyone ever had a pleasant surprise while doing his taxes?) The first was the amount of money I owed the IRS, which I guess puts me in a not very exclusive group. The second was that after scrambling to get the return filed on time, my accountant notified me that the electronic filing had been rejected by the IRS.
It seems some kind stranger had already filed my 2014 tax return for me. (But he did not take it upon himself to pay the taxes I owed.)
This also puts me into a group that is becoming less exclusive. Despite increased efforts to spot fraudulent tax returns claiming phony refunds, the IRS and state tax departments have been hit with a tidal wave of fraud this filing season. The scheme is pretty simple. With a little personal information, such as a Social Security number and a date of birth, someone can file a phony return in your name and claim a refund. They key to a successful fraud is timing. The return has to be filed early enough so that it beats the legitimate return through the system, and before W-2, 1099 and other income forms are filed that the IRS can use to verify the claim. If it goes through, the bad guy gets a refund and the IRS—and the taxpayers—get screwed.
The scam is not new. What is making it more profitable than ever is automation. The epidemic online theft of personally identifiable information, coupled with the move by IRS and states toward electronic filing, make it easy for individuals and gangs to file dozens, hundreds and even thousands of returns.
“The IRS combats tax-related identity theft with an aggressive strategy of prevention, detection and victim assistance,” the agency says on its identity protection website.
The IRS in fiscal 2014 successfully prosecuted individuals or gangs responsible for tens of thousands of fraudulent returns that generated millions of dollars in refunds. But the Government Accountability Office reported that during the 2013 tax filing season, although the IRS detected and prevented more than $24 billion in fraudulent refunds it still paid out more than $5 billion.
The numbers are not in yet for the recently passed (and unlamented) filing season. But with the percentage of electronic filings now topping three quarters and the bumper crop of PII breaches in the past year, you can expect it to be ugly. One wave of fraudulent returns that appeared to be the result of a compromise of data from Intuit’s TurboTax made big news in recent months. And that is likely to be only the tip of the iceberg.
It does not require a big data breach to enable fraudulent returns. If the IRS does not have records available to corroborate information on a filing, a small amount of PII is all that is needed. And unfortunately, basic info such as SSN and DOB are so widely scattered in the ether by now that few people probably are safe. I have no indication yet that I have been the victim of a general identity theft. No suspicious charges on credit card statements, no new accounts being opened, credit report seems fine. But somebody found at least the few pieces of information he needed to give me an uncomfortable few days.
Many of these phony philings will be caught and rejected. Some philers will be prosecuted. But we are all likely to end up sharing a hefty price for the convenience of electronic transactions.