It’s Tax Season, and States Are Battling Bogus Requests for Refunds

Last year during tax season, Utah discovered that about 8,000 state income tax returns were filed with fake IDs, which could have cost the state $11 million in bogus refunds. The fraud discovery precipitated a weekslong halt to processing taxpayers’ returns and an intense investigation that stopped all but $17,000 in false refunds.

The scam sought to take advantage of the consumer-friendly service used by Utah and many other states of sending taxpayers their refunds quickly via pre-paid debit cards that could immediately — and untraceably — be used like cash.

No more, say Utah and the other 40 states and the District of Columbia that require taxpayers to file state or local income tax returns. This year, they are working together with the IRS and the largest private tax software companies to try to discover and stop the online filing fraud quickly — sometimes before it starts — by doing a better job of verifying the identity of the filers, strengthening password protocols and sharing information on filings that use stolen identities.

The dollar stakes are high in combating the cyber fraud. The IRS lost an estimated $5.8 billion to paying out fraudulent federal refunds in 2013 alone. And states are defrauded by an estimated $8 billion to $9 billion annually, said Haywood Talcove, CEO of Government and LexisNexis Special Services Inc., which works with many states to counter the scams.

The fight against tax fraud is a “battle that seems to grow every day,” IRS Commissioner John Koskinen told state, federal and private industry tax leaders in June. “The threat from fraudsters and criminals is complex and evolving.”

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