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Tax Refund Scams: Benefits to filing early and often

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By: rcubed

February 7, 2017

Tax Refund Fraud and Identity TheftThe two constants of the universe are death and taxes, however, advancements in life extension and anti-aging research threaten to up end the former. Taxes are eternal and in some cases, literally. Estates and heirs are often hounded by the IRS for the tax obligations of the deceased. In the event that death is eventually knocked from its pedestal, an up and comer is vying to take its place: tax refund fraud.Tax refund fraud has grown from 51,000 cases since it initially surfaced in 2009 to 3 million cases in 2016. Why the explosive growth? For your consideration, the basic steps of the scam in the form of a legendary internet meme:
  1. Purchase stolen list of SSNs
  2. Create account at online tax preparation site
  3. ?
  4. Profit!
It may seem like I’m making light of a very troubling situation and oversimplifying the process behind it. My intention is certainly not to make light of it. Identity theft – which is the core exploit at the heart of this scam – is a nightmare scenario for anyone it ensnares. No one should have to fall victim to it, but the sad fact is that millions do every year. Former U.S. Attorney General, Eric Holder is a famous victim of tax refund fraud. On the second point, this fraud (scam) is exceedingly simple to perpetrate and that’s why it’s grown so rapidly. It’s also had a big assist from the lax verification process at the IRS. For all intents and purposes, such verification is non-existent at the IRS, more on that in a moment, but first, a little background.CBS “60 Minutes” aired a fascinating and very informative segment back in September 2014 on the epidemic of tax refund fraud. The host, Steve Kroft, interviewed a government investigator and a criminal behind a large fraud case in Miami, Florida. Turns out that South Florida is a hotbed for this variety of fraud with scams running the gamut from Medicare fraud to mortgage fraud to tax preparer scams. In fact, the region has earned the moniker: “Silicon Valley of scam artists.”Revisiting the steps in the meme above, the obscured step is of course key and for this particular variety of scam, the most insidious. It consists of creating a bogus W-2 using a stolen SSN. What’s nuts is you don’t even need the name associated with the SSN. Just make up one and then concoct a modest income with an equally modest refund amount, provide the address of where the IRS should send the check, and hit submit on the eFile tax form. In fact, a laptop isn’t a requirement. There are even apps for filing right from your phone. The scammer interviewed in the 60 Minutes piece often worked poolside from his phone while catching some rays!And the numbers and profit potential from this kind of scam are staggering. The criminal CBS interviewed claimed that he would file 15 returns a day which averaged out to $45,000 a day! Of course, the IRS does reject a good 60% of these fraudulent claims, but the 40% that slip by still add up both in profits to the criminals.  The tally is even larger for the U.S. Government and ultimately to taxpayers.At this point, you may be scratching your head wondering how it’s so easy for criminals to get away with this scam and why the IRS is so powerless to catch it. It ultimately gets back to the IRS wanting to get refund checks into the hands of taxpayers as quickly as possible. The law requires that the IRS send out refunds within 6 weeks of receiving a return. Legally, returns can be filed on January 1.Complicating verification is the fact that employers have until late March to submit W-2 forms for their employees to the IRS. Employees on the other hand, must receive W-2 forms from their employer by January 31st, which is simply not enough time for the IRS to verify W-2 forms. And herein lies the key advantage to the scammers: they file early hoping to beat you to the punch. Victims of this scam get a cold chill down their backs when they go to file and receive a reply from the IRS that they’ve already filed. What lies ahead for these victims is often months of paperwork, phone calls, and sleepless nights attempting to rectify the situation and receive the tax refund they're rightfully due.Increasingly, the payment method of choice for identity theft criminals is prepaid credit cards. They’ve become referred to as the “currency of crime.” What’s even crazier is that many fraudsters who elect to receive checks by mail often receive multiple refund checks to the same address. The mail carrier often never bats an eyelash! The IRS also seems to often miss this huge, honking, red flag. It’s small wonder then that this scam has surged in popularity. The government has made it so darn easy for criminals to exploit.The other side of the equation in this scam is the identity theft component, which takes the usual forms of dumpster diving, mailbox theft, and even paying unscrupulous staff at dental and doctor’s offices for patient PII. The latter is why I’ve stopped providing my SSN on new patient forms when visiting a new medical provider for the first time. They have no need for this piece of data and I refuse to provide it. You shouldn’t either. The other big source of stolen SSNs is simply buying them on the Dark Web.Obtaining PII also extends to phishing and phone scams. A scam based around tax refund fraud and one popular in South Florida, is bogus tax preparers. Such "professional" steal your PII and then abscond with both your identity and hard-earned refund check. The IRS does have some helpful information on their site describing these exploits and how to protect yourself from them. It’s a small consolation that if the IRS is doing a poor job in preventing you from falling victim due to their lax security policies and procedures at least they provide info on how to initiate fraud prevention on your end. The IRS even has a cute name for these scams: “The Dirty Dozen.”The IRS has begun instituting stronger verification practices in the last few years, but it’s primarily taken the form of issuing PINs to those who already have fallen victim to fraud. As things currently stand, the IRS still doesn’t require any supporting documents to verify identity when filing returns. At the end of the day – and as all too often is sadly the case – the onus for securing one’s PII falls on each and every one of us. With tax season upon us, this is a good reminder to follow best practices when it comes to securing your identity both on and offline. And as much as it may pain you, be sure to file early!
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