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The US government has a tremendous problem in its tax system–what government doesn’t–but this isn’t just about wasteful spending or tax laws that impact... IRS Looks To Software To Prevent Tax Refund Fraud

The US government has a tremendous problem in its tax system–what government doesn’t–but this isn’t just about wasteful spending or tax laws that impact the working poor. Instead, it’s a fraud problem that the Internal Revenue Service openly admits is horrendous, but also admits it has been nearly powerless to stop.



One of the growing offshoots of identity theft in recent years has been tax refund fraud, to the tune of between $4 billion and $5 billion paid out each year to scammers. In the still-lucrative realm of identity theft, studies have shown thieves aren’t content with stealing your credit card anymore, since that account can be closed the moment they use it. No, the real money is in nabbing your Social Security number because it’s practically permanent and can lead to huge payoffs in other ways. Part of the issue with tax refund fraud is it’s so easy to commit; in an effort be fair to those citizens who don’t have bank accounts or permanent addresses, one of the methods for receiving your legitimate refund is via prepaid Visa card, a completely anonymous method of transaction. Scammers are filing bogus returns then accepting their payments on the untraceable cards. There have been multiple arrests already of hard-core street gangs who’ve switched from traditional criminal enterprises like drugs and prostitution to tax refund fraud; it’s easy, physically safer, harder to catch, and the payout is just as good if not better.

To combat this ongoing problem, the IRS is turning to some higher-tech means. At a recent Security Summit, state and federal government officials met with leaders in the private sector tax industry to devise a plan. The first step was to increase the number of data points a filing individual needs to provide, something that could slow down the process for legitimate filing but will help protect the country from fraud in the long run.

More importantly, the Summit addressed one of the chief problems: how do we verify someone’s identity when he can use tax preparation software from home? A number of companies publish software that lets the citizen prepare and file his taxes in virtual anonymity; all it takes is your pertinent information, which the identity thief has already stolen or purchased online. All of the necessary identifying factors like Social Security number and birth date are in place, so there’s really nothing to prevent the thief from claiming to be his victim. Team members at the Summit made proposals that they say will be in place by the upcoming filing season in January.

Unfortunately, in typical government fashion, there was very little information on what precise measures will be taken. For now, though, it’s a positive step that the government is even trying to fight back.