Business

Tax-Refund Theft: Associations on Alert for Falsified Returns

After Intuit disabled part of its popular TurboTax software to prevent tax-return fraud, industry groups are keeping an eye out for fraud cases. Some suggest that the fast processing time on returns might be part of the problem.

The rapid turnaround on tax refunds has been a huge shot in the arm for both consumers and tax-preparation firms. But the increased ease of filling out your tax forms has a painful side effect: greater risk of tax-return fraud.

Earlier this month, Intuit had to temporarily disable electronic filing of state returns with its popular TurboTax software after customers reported that their returns had been fraudulently submitted through the product.

The Wall Street Journal, which first reported the problem, noted that as many as 19 states were affected by the bogus returns. Intuit turned its system back on in about 24 hours after boosting security, but some association officials say there may be only so much software companies and others can do to prevent tax fraud.

Cindy Hockenberry, manager of research at the National Association of Tax Professionals, says that inherent insecurities in the Social Security system are at least partly to blame.

“The people who are in the business of perpetrating this kind of fraud collect Social Security numbers all over the place,” Hockenberry told the Milwaukee Journal Sentinel. “Until they figure out a way to make Social Security numbers ironclad, airtight, and inaccessible by anybody, we’re going to see this kind of thing.”

In recent years, federal officials have warned about the risk of tax-filing fraud. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued an alert in 2013 that victims of identity theft were in particular danger of being defrauded of their tax refunds.

“Identity theft can be a precursor to tax refund fraud because individual income tax returns filed in the United States are tracked and processed by Taxpayer Identification Numbers (TIN) and the individual taxpayer names associated with these numbers,” FinCEN warned.

In a recent letter to Internal Revenue Service Commissioner John Koskinen, Intuit President and CEO Brad Smith implied that identity theft was behind the falsified returns submitted through TurboTax.

“To be clear, we do not believe these identity thefts that enabled tax thieves were the result of an Intuit breach,“ Smith wrote. “Rather, we believe these identities were stolen elsewhere in well-documented breaches of various kinds, and then used to try to penetrate the American tax system.”

Tackling the Issue

The Federation of Tax Administrators, a trade group for state and local tax-collecting bodies, has been working closely with Intuit to try to figure out the cause of the problem. Earlier this month, FTA Director Gale Garriott told USA Today that its members are working together to spot potential patterns in the fraudulent returns.

“States are taking this seriously and want to make sure legitimate taxpayers can file,” Garriott said.

Even so, FTA Deputy Director Verenda Smith suggested that there may be a systemic problem at play—one that’s putting states in a difficult position.

“America is addicted to fast refunds, and that addiction is sucking good money out of the budgets,“ Smith told the Wall Street Journal in response to the letter from Intuit’s Brad Smith. “What we need from politicians is permission to process a return for a month or two before sending out a refund.”

(iStock/Thinkstock)

Ernie Smith

By Ernie Smith

Ernie Smith is the social media journalist for Associations Now, a former newspaper guy, and a man who is dangerous when armed with a good pun. MORE

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