People who waited until Wednesday’s deadline to file their tax returns may have found that someone hijacked their refund. That’s what happened to several of my clients this year. Here are a couple of their stories:
One client arrived home to find a letter from the IRS that they were conducting a review of questionable income amounts and claims for credits listed on his return. His conversation went like many thousands before...
Client: "What return? I haven't even filed yet."
IRS: "Ummm…yes you have".
Well my client was right of course; he hadn't filed his return...but someone else had filed it for him.
Other clients discovered the identity theft when I attempted to electronically file the return. The IRS will not accept a return that has already been filed.
Naturally, the first question they ask me is: "How can this happen?" That's a good question and one I myself wanted to know the answer too. This is how it works:
A criminal steals your identity (more on that later), files a bogus tax return in your name and collects a refund check from the IRS. Then when you go to legitimately file your return, it’s rejected by the IRS because someone else already filed as you!
It’s such a simple scam you would think surely the IRS is protecting themselves and taxpayers from it….but they aren't.
Corey Williams told his story to 60 minutes. He used to be a legitimate tax preparer until his boss turned him on to the scam. Before he was arrested and sentenced to 40 months in prison, he made millions of dollars. He said all you need for this fraud is a laptop, internet access, someone's SSN, date of birth, not even their name.
According to Mr. Williams, it's as easy as one, two, and three.
1. Collect or buy a list of stolen identities (available for sale on the black market for $3 - $5)
2. Go to one of dozens of tax preparation sites on line, and using the stolen social security numbers and dates of birth you fill out a completely bogus W-2 form, claiming a modest refund of a few thousand dollars.
3. Tell the IRS where to send the money, your house, wired to your bank account or loaded onto a prepaid debit card.
That's it. You simply put down a name and a SSN, make up an employer or the amount of money that was earned and withheld. Send it off to the IRS and they will send you a check back for the refund.
But how did the IRS not catch this?
You would think the IRS computers would notice that they were sending thousands of checks to a single address. But they don't.
And you might expect the IRS would match taxpayer returns with legitimate W-2 forms filed by employers. It doesn't do that either because the law requires refund checks to be sent out within six weeks; and employer W-2's are often not available until months later. So if a bogus return is received before a legitimate one, the check will go to the criminals.
It’s a pay first, ask questions later tax refund system.
This scam has been around since 2008 and the IRS still cannot tell if the person filing the return and claiming the refund is actually the real taxpayer. In 2014 the IRS lost $6.5 BILLION in fraudulent refunds.
Yes that's B for billions.
The IRS is well aware of the magnitude of the problem. But with budget cuts and an outdated system there is only so much they can do.
- John Koskinen
But despite the $200 million IT budget cut this year the most notable step the IRS has taken to protect taxpayers has been the roll-out of an identity protection PIN. Essentially, if you’ve been a victim of tax fraud, the IRS will issue a PIN number to use when filing electronically.
This is designed to address the problem inherent to this kind of fraud: Unlike passwords or a credit card, you can’t “reset” your SSN – you’re stuck with it for life.
Unfortunately, the PINS are currently only available to filers with past resolved fraud cases as well as to taxpayers in Georgia, Florida and the District of Columbia—areas with high incidences of fraud. They are also available to taxpayers with suspicious activity on their accounts.
To get a unique PIN number or find out if you are eligible, visit the IRS website or call 1-866-704-7388. You will be asked for information from last year’s tax return and can then select a six-digit PIN to file your return. The PIN is only good for one tax year, so the IRS will send you a new one in December.
April 15th has come and gone but tax refund fraud will be sticking around until some major changes are made to how we file returns. Researching this issue has helped me realize how serious identity theft is and the measures that everyone should be taking to protect their personally identifiable information. No one is immune no matter how tightly held your personal information is.
Stay tuned for articles and resources on what you can do to minimize your exposure.