Tax Refund Fraud

Identity Fraud Scenario

Annual tax refund fraud losses are estimated in tens of billions, impacting millions of Americans. Even worse, identity theft-related tax refund fraud cannot be detected on credit reports.

As refund requests have grown, so too has the incentive for criminals to hijack personal identity information. This disconcerting trend not only hurts the citizen, whose information and refund has been stolen–it diverts resources away from serving citizens. Federal, state and local employees expend valuable time working with citizens to resolve the issue and recoup the refund.

  • More than $106 billion dollars are lost to improper payments each year, including tax fraud.

  • The U.S. Treasury Inspector General for Tax Administration estimates that phony refunds could total $21 billion by 2017 if states and the IRS don’t take major precautions to understand and authenticate identities on the front-end of the tax return process.

  • In a 2012 report, the Treasury Inspector General for Tax Administration (TIGTA) found that billions of taxpayer dollars are being paid to fraudsters unnecessarily due to identity theft. The problem also is occurring at the state level, where criminals use fake identities to request tax refunds in the 43 states with an income tax.

There are hundreds of opportunities for criminals to commit tax refund fraud because these organized criminal groups have such large inventories of stolen identity information. These organized criminal groups also use sophisticated data mining technology to determine the identities that are the most valuable.

Unfortunately, when it comes to stolen identities, there is a loophole in the conventional wisdom that identity thieves will wait over a year to use a stolen identity for fraud: identity theft-related tax refund fraud. This fraud will never show up on a credit report, and when performed at a state level, is extremely difficult to detect. Taxpayers and government agencies only learn about it when the taxpayer tries to file for a tax refund in their state and finds a fraudster beat them to the punch and filed for a refund before they did, and the taxpayer and the agency never detect the fraud.

If identified, the taxpayer then spends countless hours over a period of about 18 months trying to get the agency to pay them the refund they actually deserve. Ultimately, the taxpayer will be paid, but so will the fraudster. The taxpayer gets hit once as an identity theft victim and again as a taxpayer because the government will pay the refund twice.

Criminals often use the financial information of deceased persons or personal information stolen from large organizations to steal refunds. They combine this basic data with information publicly available on the Internet to steal the refunds of taxpaying citizens”and they are good at it. Estimates put tax refund fraud at up to five percent and rising, which translates to billions of dollars mailed away every year. TIGTA also estimates the IRS could issue $21 billion in potentially fraudulent tax refunds resulting from identity theft over the next five years. That's money that could go to job retraining programs, salaries for police officers and firefighters, and keeping the lights on. It's funding that the Federal government and states are intent on getting back.

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