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Income Tax Refund Fraud

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Wheres My Tax Refund?Income Tax Refund Fraud

Frank A. Suponcic, CPA, CFE, CFFJanuary 13, 2016

WHAT DO I DO?

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STATISTICSTAX REFUND FRAUD

In 2013, the IRS paid fraudulent income tax refunds due to identity theft of $6,800,000,000!

Government Accounting OfficeIn 2013, the IRS prevented $24,200,000,000 in fraudulent identity theft refunds

Government Accounting Office

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STATISTICS

From 2011 2014, the IRS stopped 19,000,000 suspicious income tax returnsand prevented fraudulent refunds of $63,000,000,000.

Government Accounting Office

The IRS projects that income tax refund fraud will reach $21,000,000 by 2016.

TAX REFUND FRAUD `

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THINK YOU ARE AT RISK?

Most people have had some of their personal information stolen at least once.

816,000,000 pieces of personal identification information has been stolen since 2005. (Privacy Rights Clearinghouse)

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CPA SURVEYNearly two-thirds of the CPA tax preparers responding to the Journal of Accountancy most recent tax software survey indicated that one or more of their clients has been a victim of identity theft tax refund fraud. - Journal of Accountancy, January 2016

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REQUIRED DATAName AddressSocial security numberDate of birth

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THE 2015 ANTHEM BREACH

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THE SCHEME1040s can be filed on January 1Employers are not required to file W-2s with the Social Security Administration until MarchSome estimate that one-half of all refunds are filed by the time employers are required to file the W-2s.The IRS begins matching W-2s to 1040s filed in June.The push towards, and ease of, paperless tax filing

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MAKING A FAKE W-2Taxpayers:Name, Address, Social Security Number

Payors: Name, Address, Federal ID Number

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ELECTRONIC FILINGEasier for you and criminals to file fraudulent income tax returnsCaused occurrences of income tax fraud to materially increase125,000,000 filed income taxes electronically in 2014.In Oregon, 90% of filers filed electronically in 2015

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REFUND FRAUDINCOME TAXFederal or State Make that 43 StatesFraudsters file early in the tax yearThey DO NOT file extensions

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THE BAD DAY BEGINS WHENElectronic Filing:You or your paid preparer is notified immediately that the electronic income tax filing has been rejected.

Paper Filing:The taxpayer is notified in writing by the IRS or State Income Tax Agency that another income tax return has already been filed.

The IRS notifies you in writing of a collection matter or a refund offset that is not true.

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IRS IDENTITY THEFT

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THE SOUND OF FRAUD

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A QUICK RESOLUTION?The IRS took an average of 312 days to resolve income tax related identity theft cases that closed between August 2011 and July 2012.

- Treasury Inspector General for Tax Administration Report November 7, 2013

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IRS RED FLAGSMultiple refund checks sent to the same addressMultiple deposits sent to the same bank account

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13 TIGTA REPORT FINDINGS

In the 2011 tax processing year TIGTA identified:Five addresses that accounted for 4,864 fraudulent income tax returns reflecting $8,104,493 of refunds.One address in Lansing, MI was mailed 2,137 of fraudulent income tax returns reflecting $3,316,051 of refunds.655 refunds were sent to the same address in LithuaniaTop five cities for fraudulent filing: Tampa, FL, Miami, FL, Atlanta, GA, Detroit MI and Houston, TX

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13 TIGTA REPORT FINDINGS

Q. Whos Identities Were Stolen and Used?Individuals who werent normally required to file an income tax return

DeceasedElderlyCitizens of U.S. PossessionsStudents between the ages of 16 and 20Children under the age of 14Those whose income level didnt require a tax return filingMilitary serving overseas

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GANG ACTIVITYGangs and Organized CrimeThe Long Beach Insane Crips (a California Street Gang) filed fraudulent federal income tax refund returns attempting to secure $11,000,000They did secure $3,300,000 in fraudulent tax refundsA sting operation brought them downFraudulent returns can be filed, and rejected, with little chance of any legal consequences - or the risk of physical harm or death commonly associated with other illegal gang activities

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CRIMINAL CHARGESConspiracyWire fraudAggravated identity theftMail fraudTheft of government funds

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THE CPA RESPONSEElectronically filed Federal Form 1040 generates rejection code 902 Taxpayer TIN in the return header must not be the same TIN of a previously accepted electronic return for the return type and tax period indicated in the tax return.E-file help desk (866) 255-0654. The CPA should call to confirm the rejection.A paper return is required by the required due date or 10 calendar days after the date the IRS provides notification that they have rejected the income tax return

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THE CPA RESPONSEInclude Federal Form 8948 Preparer Explanation for Not Filing Electronically. Indicate that the return was rejected by the IRS and include the rejection code.

Attach Federal Form 14039 Identity Theft Affidavit for each taxpayer named on a joint return

Consider Filing an Ohio Identity Theft Affidavit Form IT-TA

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REFUND FRAUDFEDERAL INCOME TAX3,000+ IRS agents have been assigned to identity theft related issues35,000+ IRS employees have been trained to recognize identity theft indicators The average prison term from 2013 IRS fraud convictions is 38 months

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REFUND FRAUDPERSONAL ID NUMBERS

The IRS has issued 1.5M six digit PINs to ID theft taxpaying victims and offered PINs to another 1.7MResidents of GA, FLA and Dist. of Columbia are eligibleThe IRS will mail you a new PIN every December.The number of PINs being issued is doubling on an annual basis

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HANDS ARE TIEDIRS Budgetary constraints - $200M IT Budget CutLess IRS IT StaffingLegal mandates Quick turn-around (Some states mandate how quickly a refund must be returned to the taxpayer.)There is not enough time to thoroughly examine each individual income tax return to guarantee accuracy

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GOVERNMENT RESPONDSThe IRS has a new policy whereby they will allow victims of income tax refund fraud to secure copies of the fraudulent income tax returns filed (using their name and social security number)Clustering filter address, zip code, bank routing numbers, amounts of income, withholding, filing requirement, prisoner status, age, filing historyIRS locked accounts of deceased individuals that stopped 47,000 fraudulent returns from being filed in the first two months of 2015The IRS now uses 196 identity theft filters (up from 114) in order to deter identity theft fraudThe IRS should acknowledge receiving your request in 30 days and provide them to you in 90 daysDirect deposits sent to one bank account is now limited to threeSharing of prisoner information between the federal and state agencies

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GOVERNMENT RESPONDSIncome tax refund fraud has been proposed to have a specific category as a felony offenseIdentity Theft and Tax Fraud Prevention Act introduced in 2013 requested the line above. 3 years to pass!The same bill was introduced with the same name in 2015 it also limits the use of the social security number (healthcare)

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COLLABORATIONLeading tax software companies are now starting to share 20 new pieces of data with the IRS and State income tax agenciesImproper or repetitive use of Internet Protocol Numbers the computers address from which tax returns are sentThe time it takes the preparer to complete a return

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STATE TAX REFUND FRAUDEach of the 43 states approach income tax refund fraud differentlyIdentity based state income tax refund fraud is up 3,700 percent. Lexis NexisEveryone does not file a federal income tax return AND a state income tax return. States cannot check a federal filing if one has not been filed.

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STATE OF OHIO

In 2014 (filing year 2013) in the State of Ohio, 90% of all fraudulent income tax returns were blocked

criminals were still able to steal $28,000,000 -1.5% of all income tax refunds

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STATE OF OHIO TAX FRAUD2013 Ohio Identity Theft Returns Filed 64,0002014 Ohio Identity Theft Returns Filed 168,000 (8/31)2012 Ohio Identity Theft Return Claims - $10M2013 Ohio Identity Theft Return Claims - $277MFiling year 2014 The Quiz is implemented2014 Ohio Identity Theft Return Claims - $160M

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OHIO REFUND QUIZImplemented in 2015 (2014 tax filing year)$3.5M contract with LexisNexis Risk Management SolutionsFour questions for cash refunds and refunds credited10% flunked - modifications were made.Questions were asked about ex-spouses, former homes, old vehicles amongst other pieces of data.The Ohio Legislative attempted to limit questions obtained from information to the most recent five years. This line item provision in the budget was vetoed by Gov Kasich.

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STATES FIGHT BACKImproved databases and systems including identity theft filters and tax return qualifiersCross matching and using external databases such as the Social Security Administration Death Master File, Internal Revenue Service, Federal Trade Commission and United States Postal Service.QuizzesDelayed income tax refunds = less fraud and > unhappy taxpayers (and CPAs) > unhappy elected officials.Delayed refunds are costing states interest required to be paid to taxpayers for slow refunds.States require resident notification of suspected data breachesPossessing someone elses personal information without cause is now a crime in some states

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ALABAMA1,850,000 returns were filed in 2014 Less than 1,100,000 were processed by AugustAlabama pays 3% interest on unpaid refundsThe 3% is a cost of doing business these days as it is less than the amount of money lost due to income tax refund fraud

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NOW WHAT?I AM A VICTIMPlace a Fraud Alert on your credit reports by calling any one of the three nationwide credit reporting companies: Equifax: 1-800-525-6285 Experian: 1-888-397-3742 TransUnion: 1-800-680-7289Immediately secure and review all three of your credit reports carefully, looking for fraudulent or unauthorized inquiries or activityVerify your Social Security Administration earnings statement annuallyClose any accounts that have been tampered with or opened fraudulently File a police report in the city where you resideFile the applicable affidavits with income tax agencies

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NOW WHAT?I AM A VICTIMCredit freezeCredit monitoringClose and then re-open new bank accounts and/or credit card accounts (depending on the ID Theft)Discuss increased bank monitoring on your checking accountsFile an Identity Theft Victims Complaint and Affidavit with the Federal Trade CommissionDocument every step you take and call you makeNever discuss your identity theft case with anyone wherein you did not initiate the telephone call

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CREDIT REPORTSSECURE YOURInspect your credit report regularly You are entitled to one free report a year from each nationwide credit reporting agency Online: www.AnnualCreditReport.com Application has been distributed Phone: 1-877-322-8228 Mail: Annual Credit Report Request Service P.O. Box 105281 Atlanta, GA 30348-5281

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QUESTIONS?

Frank Suponcic CPA, CFE, CFF

Partner at Skoda Minotti(440) 449-6800fsuponcic@skodaminotti.com

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