How fraudulent filers are stealing tax refunds and what you need to watch out for Featured

8:34pm EDT November 30, 2012
How fraudulent filers are stealing tax refunds and what you need to watch out for

This past tax season, you could have filed your tax return, but then found out your return had been flagged and someone already collected a refund under your name.

“A lot of CPAs at the end of the filing season found out that a number of their clients fell victim to tax identity fraud, which significantly lengthens the time it takes for them to get legitimate refunds or fix the error,” says Michelle Mahle, CPA, director of tax at SS&G.

Smart Business spoke with Mahle about this growing fraud problem and how taxpayers can try to protect themselves.

What is happening with this type of identity fraud?

Thieves steal someone’s name and Social Security number and use it to e-file a false tax return with a refund, taking money from the IRS. The thieves use e-file because of the quick refund turnaround and often have the refund deposited to a debit card. Then, when the taxpayer e-files a legitimate tax return, there’s immediate notification that a tax return has already been filed for this Social Security number.

An employer has to issue W-2s to employees by Jan. 30, but those forms are not due to the IRS until the end of February. Most fraudulent tax returns requesting refunds are filed in January or February as soon as the e-filing season opens. At that time, the government doesn’t have the information on file to verify what the taxpayer reports. Yet the IRS continues to fall under extreme scrutiny to turn around refunds as quickly as possible.

How does tax identity fraud affect individual taxpayers?

It causes unnecessary delays to refunds, but you won’t know until you file your return and it’s rejected. If there’s a problem with your electronically filed tax return, you’ll get an immediate notification. Then the CPA or tax adviser you are working with would likely step in and deal with the IRS on your behalf. A paper return works the same way; it just takes longer for it to be processed and for the notification letter to get back to you.

It can take four to six months — probably closer to the six-month range — to resolve the issue and get a refund issued to the legitimate taxpayer. The burden of proof falls on the legitimate taxpayers to go through the trouble of proving who they are and why they are entitled to the refund. For example, one taxpayer filed in June and the IRS flagged the return as suspicious. The return consisted primarily of a large salary with a lot of withholdings, resulting in a significant tax refund. The taxpayer didn’t get the refund until around Sept. 15. Normally, with e-file, the refund cycle can be as short as 11 days.

How is tax identity fraud growing?

It’s becoming more prevalent, and the statistics every year are astounding. The IRS has issued billions of dollars in fraudulent refunds. Like credit fraud, the money is usually already spent by the time the government finds and convicts someone of the crime. Many taxpayers are caught off guard and immediately want to know their risk or exposure. CPAs and tax advisers should be warning their clients that this could happen to them.

What can taxpayers do to protect their identity from being used for tax fraud?

Even the most cautious, careful person can fall victim to this type of fraud, based on the way records are kept and maintained. Taxpayers may be doing well with protecting their credit card information, but they also have to be aware of tax identity theft and protect their Social Security number. It really is a matter of matching a name and a Social Security number, and that’s it — the address seems to be irrelevant for purposes of claiming that refund. In one instance, multiple fraudulent returns were filed with the same mailing address.

The government does require that Social Security numbers not appear on documents being sent through the mail, but that may or may not be happening. In many cases, thieves actually steal mail from mailboxes. It’s been so severe that postal workers have been mugged for information around retirement villages or communities, which is particularly prevalent in Tampa Bay and Miami, Fla. If you’re living in a retirement community, it may make sense to use a post office box. Also be conscientious of paper documentation at stores requesting credit applications or completing forms at medical facilities and how they file, share or dispose of your Social Security number. If someone needs your Social Security number for a specific purpose, perhaps write it down in a manner that can be immediately discarded.

If you can legitimately speed up the timing of your filing, you also should do so, as the fraudulent returns are generally filed early on. However, that’s not an option for a lot of taxpayers.

How is the IRS reacting?

There’s been nothing specific announced yet for this upcoming tax season, although the IRS is definitely aware of the increasing fraud and working to control it. If they come out with any provisions or changes, it will be on its website,

One way it could possibly crack down is to only allow one refund per account. The IRS also will be looking more closely at mailing addresses in the upcoming filing season and appears to have implemented an internal grading system that makes a return ‘suspicious.’ The IRS can implement things that would restrict a lot of the occurrences, but in the end, it also restricts the flexibility we have as taxpayers. So, do we want to be inconvenienced and have our affairs secure, or have the convenience of a quick, timely refund at the cost of having our affairs exposed to tax identity fraud?

Michelle Mahle, CPA, is a director of tax at SS&G’s Cleveland office. Reach her at (440) 248-8787 or

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