IRS Braces for 2016 Tax Fraud Season

CashWhen the IRS begins accepting tax returns on Tuesday, nearly all of the parties involved — taxpayers, tax authorities and software providers alike — will be on alert.

The scars of the previous filing season — which was marked by an apparent surge in tax fraud and a precipitous decline in the IRS’s customer service are evident as officials and taxpayers gear up for the new session. Tax officials and tax preparation companies are touting new security measures meant to crack down on the criminals that use stolen data to file fraudulent tax returns.  “The IRS has been working closely with the tax industry and state revenue departments to provide taxpayers with stronger protections against identity theft,” said IRS commissioner John Koskinen on a call with reporters about the start of the filing season. “Because of these new protections, taxpayers may notice some minor – but important — changes when they file their returns.” As a result, some tax officials are asking filers to have patience while authorities gather enough details from them, employers, and other sources to confirm identities before refunds are paid out. Some states, such as Utah and Illinois have already cautioned that refunds won’t be issued until late February or March.

“The old days of fast refunds are gone,” said Verenda Smith, deputy director of the Federation of Tax Administrators, a group representing state tax authorities. State tax agencies are using quizzes, letters and other measures to collect more information from consumers. They’re also matching identities against driver’s license databases and putting pressure on employers to report wage data earlier. Utah, for instance, passed a law last year that prohibits refunds from being paid out before March 1 unless both the employer and the taxpayer have filed the necessary income forms. On the tax preparer front, software providers are requiring account holders to use stricter passwords and login requirements meant to reduce the chance that a criminal can access their accounts. TurboTax, the largest online tax filing service, will now alert users if a second account has been created with their Social Security number, giving taxpayers a heads up that someone else may be attempting to file in their name. Users of TurboTax and other software providers, including H&R Block, will also have the option of requiring multi factor authentication. After entering a password, users would also need to enter a unique code sent to their phones or emails.

For the first time, the IRS, state tax officials and tax software providers will share information in real time about suspicious returns in an effort to spot patterns and catch fraud as it happens. Information shared will include technical details on where a return is filed and how it is prepared. Eventually, the sharing will take place through a centralized database meant to allow tax companies, states and the IRS to share details anonymously about apparent attacks. The increased communication is meant to combat a trend that became more apparent last year: As data breaches increase criminals’ access to sensitive personal information, the phony tax returns filed by fraudsters are more closely resembling the ones filed by legitimate taxpayers. Despite all of these efforts, some taxpayers, who learned last year that their identities had been stolen, are still rethinking what the best way to file their tax returns should be. Some may file sooner than they have in the past, knowing that sophisticated criminals may race to steal their refunds. Other questions remain. Some states are placing restrictions on how refunds can be paid out, hoping the move will reduce their losses. In particular, some authorities hesitate to deposit refunds onto prepaid cards, which have emerged as the vehicle of choice for fraudsters because of how difficult they can be to track.

Utah state tax commissioner John Valentine said the state is seeking a more reliable method for identifying prepaid cards so that those returns can receive additional scrutiny. Julie Magee, commissioner of revenue for Alabama, said that in some cases, the state may opt to issue paper checks that can be sent to a known address on file. The IRS enters this filing season with $290 million in additional funding that it can use to support efforts to fight identity theft, bolster cyber security and improve customer service. Last filing season, taxpayer services reached a new low. More than 60 percent of calls to the IRS went unanswered, according to a report from the Government Accountability Office. Those taxpayers who did get through waited more than 30 minutes, on average. Koskinen said service may improve this year, when the IRS will hire more than 1,000 additional customer service representatives to man the toll-free phone lines. But just how much of an improvement is made will depend on how many taxpayers end up needing help, he said.