In 2013, the IRS named tax refund identity theft its number one scam of the year. Between 2008 and 2012, the Department of Justice identified over a half million people whose identities had been stolen as part of tax refund identity fraud. The U.S. General Accountability Office (GAO) issued a report earlier this year estimating the cost of fraudulent tax returns to taxpayers was as much as $5.2 billion in 2013. While the IRS has improved fraud screening filters and continues to make identifying and prosecuting these crimes a priority, tax refund identity theft is expected to be an ongoing issue in the years ahead. Here’s a closer look at what you should know.
How Does Tax Refund Fraud Work?
Tax refund fraud is relatively simple to execute. Criminals obtain the names, birth dates, and social security numbers of unsuspecting individuals. Names are sometimes bought in lists or procured through bribing employees of businesses with access to this information, like banks or hospitals. The criminal then uses an online tax preparation site to electronically file a false tax return. (E-filed tax returns don't require supporting documentation.) They may then elect for their refund to be disbursed onto a prepaid debit card, which can be hard to trace.
Many victims of this crime are unaware of the problem until they are notified by the IRS of a discrepancy. Commonly, individuals will receive notification that they've filed multiple tax returns, received wages from an employer unknown to them, or that they have a balance due for a year when they didn't file a tax return.
The IRS uses a "look-back" compliance method, rather than waiting until all checks are complete before issuing refunds. Form W-2 information is often unavailable until long after employee returns are filed. As a result, issues aren't caught until months after the fraud has occurred.
GAO recommendations include encouraging businesses to e-file Forms W-2 and accelerating W-2 deadlines. But whether the government will take action on these recommendations has yet to be seen.
How Can Businesses Help Protect Employees?
Businesses can take several steps to help protect employee information and assist employees who may be victims.
- Use an online payroll provider. Employers collect sensitive information from employees, including birth dates and social security numbers, for tax reporting purposes. Paper files or desktop-based systems potentially make data vulnerable to hackers or dishonest employees. Using an online payroll provider can increase the likelihood that records are stored securely, that security protocols are being followed, and that internal access to information is restricted.
- E-file Forms W-2. If the option is available to your business, consider e-filing your Forms W-2 and 1099. Taking this step gives the IRS access to comparative information, and enables them to assess the accuracy of returns filed with your employees’ social security numbers, more quickly.
- Consider offering identity protection benefits. Another strategy to help protect your employees from identity theft is offering identity protection benefits. Options to consider include credit monitoring and active support resolving identity theft cases.
- Educate your employees. Many people have never heard of tax refund identity fraud. While media reports and government outreach help raise awareness, employers can advise employees on what tax refund fraud is and how to prevent it. For more information, refer employees to the IRS' identity protection resources page.
Companies can help combat tax refund identity theft by using online payroll systems to protect valuable employee data and by educating employees on resources available from the IRS.