The Big Business of Tax Fraud

Thanks to a mixture of creative criminal activity and lax controls, tax season is one of the busiest, most lucrative times for identity thieves. As such, the IRS will be as busy fighting identity fraud as it will be processing tax returns. In 2012, the IRS admitted that it might not have merely paid out more than $5 billion in the previous year to identity thieves filing for bogus tax refunds, but it would also likely pay out an additional $20 billion in the next few years as tax fraud criminals continue to slip past their defenses.

Update 07/2015: The U.S. Internal Revenue Service paid an estimated $5.8 billion in fraudulent refunds related to identify theft in 2014.

Those defenses were dramatically increased when the IRS hired 3,000 new agents whose only focus would be to weed out identity theft. Additionally, the IRS plans to offer additional training to help its 35,000 employees spot fake refund claims. Let’s hope their efforts work.

From 2011 through October 2014, the IRS has stopped 19 million suspicious tax returns and protected more than $63 billion in fraudulent refunds. It’s a good start, but chances are the IRS only caught the low-hanging fruit – fraudulent refunds filed by amateurs drawn to the scam by all the publicity.

The biggest problem for the IRS is that tax refund identity theft isn’t hard. Typically, the IRS only looks for a name, address and Social Security number to process and pay a refund. IT doesn’t help that thieves know if the refund is for less than $10,000, the return rarely earns a second look. Even a major change often goes unnoticed, For example, you may not have filed for any dependent children last year, but this year you’re filing for four teens. An experienced and disciplined identity theft gang can file thousands of tax returns using information obtained from various sources and disappear with millions of dollars in fraudulent payments.

For example, Operation Rainmaker, a Florida scam pulled off by street-level drug dealers in 2011 involved fraudulent tax refund claims of more than $130 million. The scam was so lucrative, former drug dealers hosted one-day seminars in local hotels where they taught other criminals how to use the Internet to steal identities and how to use Turbo Tax to file bogus tax returns.

While the IRS is likely to catch a lot more fraudulent returns this year, it’s also likely that billions of dollars will still be paid out to identity thieves. This could possibly leave millions of victims unable to file, subjected to a lengthy investigation, and maybe even unable to pay urgent bills they were relying on their tax refund to cover. Just last year, I called in crisis counselors to help support a victim of tax refund identity theft who threatened to commit suicide when told that the $5,000 refund she depended on to cover the cost of her antidepressants had already been paid to a complete stranger. A sharp reminder of how personal and costly this crime can really be. Consumers have a number of defenses:

  • File as early as possible in the hope you’ll beat the thieves to it.
  • If you are notified that your refund has already been paid, don’t panic. Contact the IRS identity theft hotline and follow their instructions. I’ve seen the IRS reimburse victims in a matter of weeks.
  • If you need your refund for an emergency, have a backup payment plan like a loan, overdraft or credit card.

The views and opinions expressed in this article are those of EZShield Inc. alone and do not necessarily reflect the opinions of any other person or entity, including specifically any person or entity affiliated with the distribution or display of this content.

Neal O’Farrell is one of the leading authorities on identity theft, and has spent 30 years fighting cybercrime and identity theft around the world....
Read more about Neal O'Farrell.

Leave a Comment.