This document discusses income tax refund fraud and identity theft. Some key points: - In 2013, the IRS paid $6.8 billion in fraudulent refunds due to identity theft and prevented $24.2 billion in fraudulent refunds. - Criminals are able to file fraudulent tax returns early in the year before employers file W-2s, and receive refunds before fraud is detected. - Common personal information stolen includes names, addresses, social security numbers, and dates of birth. The Anthem breach exposed personal data of over 80 million people. - The IRS takes an average of 312 days to resolve identity theft cases. Victims may need to place fraud alerts, review credit reports

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Income Tax Refund Fraud
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2. “Where’s My Tax Refund?”
Income Tax Refund Fraud
Frank A. Suponcic, CPA, CFE, CFF
January 13, 2016

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WHAT DO I DO?

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STATISTICS
TAX REFUND FRAUD
“…In 2013, the IRS paid fraudulent
income tax refunds due to identity theft
of $6,800,000,000! ”
– Government Accounting Office
“In 2013, the IRS prevented…
$24,200,000,000 in fraudulent identity theft
refunds…”
– Government Accounting Office

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STATISTICS
“From 2011 – 2014, the IRS stopped
19,000,000 suspicious income tax
returns…and prevented fraudulent
refunds of $63,000,000,000.”
– Government Accounting Office
The IRS projects that income tax refund
fraud will reach $21,000,000 by 2016.
TAX REFUND FRAUD
`

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THINK YOU ARE AT RISK?
Most people have had some of their
personal information stolen at least
once.
816,000,000 pieces of personal
identification information has been stolen
since 2005. (Privacy Rights Clearinghouse)

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CPA SURVEY
“Nearly two-thirds of the CPA tax preparers
responding to the Journal of Accountancy
most recent tax software survey
indicated that one or more of their clients
has been a victim of identity theft tax refund fraud.”
- Journal of Accountancy, January 2016

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REQUIRED DATA
1. Name
2. Address
3. Social security number
4. Date of birth

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THE 2015 ANTHEM BREACH

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THE SCHEME
• 1040’s can be filed on January 1
• Employers are not required to file W-2’s
with the Social Security Administration
until March
• Some estimate that one-half of all
refunds are filed by the time employer’s
are required to file the W-2’s.
• The IRS begins matching W-2’s to
1040’s filed in June.
• The push towards, and ease of,
paperless tax filing

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MAKING A FAKE W-2
Taxpayer’s:
• Name, Address, Social Security Number
Payor’s:
• Name, Address, Federal ID Number

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ELECTRONIC FILING
• Easier for you – and criminals to file fraudulent income
tax returns
• Caused occurrences of income tax fraud to materially
increase
• 125,000,000 filed income taxes electronically in 2014.
• In Oregon, 90% of filers filed electronically in 2015

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REFUND FRAUD
INCOME TAX
• Federal or State
• Make that 43 States
• Fraudsters file early in the
tax year
• They DO NOT file extensions

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THE BAD DAY BEGINS WHEN
Electronic Filing:
• You or your paid preparer is notified immediately that the
electronic income tax filing has been rejected.
Paper Filing:
• The taxpayer is notified in writing by the IRS or State Income
Tax Agency that another income tax return has already been
filed.
• The IRS notifies you in writing of a collection matter or a
refund offset that is not true.

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IRS IDENTITY THEFT

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THE SOUND OF FRAUD

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A QUICK RESOLUTION?
• The IRS took an average of 312 days to resolve income
tax related identity theft cases that closed between
August 2011 and July 2012.
- Treasury Inspector General for Tax Administration Report
November 7, 2013

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IRS RED FLAGS
• Multiple refund checks
sent to the same address
• Multiple deposits sent to
the same bank account

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’13 TIGTA REPORT FINDINGS
In the 2011 tax processing year TIGTA identified:
• Five addresses that accounted for 4,864 fraudulent
income tax returns reflecting $8,104,493 of refunds.
• One address in Lansing, MI was mailed 2,137 of
fraudulent income tax returns reflecting $3,316,051 of
refunds.
• 655 refunds were sent to the same address in Lithuania
• Top five cities for fraudulent filing: Tampa, FL, Miami, FL,
Atlanta, GA, Detroit MI and Houston, TX

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’13 TIGTA REPORT FINDINGS
Q. Who’s Identities Were Stolen and Used?
A. Individuals who weren’t normally required to file an income
tax return
• Deceased
• Elderly
• Citizens of U.S. Possessions
• Students between the ages of 16 and 20
• Children under the age of 14
• Those whose income level didn’t require a tax return filing
• Military serving overseas

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GANG ACTIVITY
• Gangs and Organized Crime
• The Long Beach Insane Crips (a California Street Gang)
filed fraudulent federal income tax refund returns
attempting to secure $11,000,000
• They did secure $3,300,000 in fraudulent tax refunds
• A sting operation brought them down
• Fraudulent returns can be filed, and rejected, with little
chance of any legal consequences - or the risk of
physical harm or death commonly associated with other
illegal gang activities

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CRIMINAL CHARGES
• Conspiracy
• Wire fraud
• Aggravated identity theft
• Mail fraud
• Theft of government funds

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THE CPA RESPONSE
• Electronically filed Federal Form 1040 generates rejection code 902
• “Taxpayer TIN in the return header must not be the same TIN of a
previously accepted electronic return for the return type and tax
period indicated in the tax return.”
• E-file help desk (866) 255-0654. The CPA should call to confirm the
rejection.
• A paper return is required by the required due date or 10 calendar
days after the date the IRS provides notification that they have
rejected the income tax return

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THE CPA RESPONSE
• Include Federal Form 8948 – Preparer Explanation for
Not Filing Electronically. Indicate that the return was
rejected by the IRS and include the rejection code.
• Attach Federal Form 14039 – Identity Theft Affidavit for
each taxpayer named on a joint return
• Consider Filing an Ohio Identity Theft Affidavit –
Form IT-TA

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REFUND FRAUD
FEDERAL INCOME TAX
• 3,000+ IRS agents have been
assigned to identity theft
related issues
• 35,000+ IRS employees have
been trained to recognize
identity theft indicators
• The average prison term from
2013 IRS fraud convictions is
38 months

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REFUND FRAUD
PERSONAL ID NUMBERS
• The IRS has issued 1.5M six digit PINs to ID theft
taxpaying victims and offered PINs to another 1.7M
• Residents of GA, FLA and Dist. of Columbia
are eligible
• The IRS will mail you a new PIN every December.
• The number of PINs being issued is doubling on an
annual basis

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HANDS ARE TIED
• IRS Budgetary constraints - $200M IT
Budget Cut
• Less IRS IT Staffing
• Legal mandates
• Quick turn-around (Some states mandate how quickly a
refund must be returned to the taxpayer.)
• There is not enough time to thoroughly examine each
individual income tax return to guarantee accuracy

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GOVERNMENT RESPONDS
• The IRS has a new policy whereby they will allow victims of income tax
refund fraud to secure copies of the fraudulent income tax returns filed
(using their name and social security number)
• Clustering filter – address, zip code, bank routing numbers, amounts of
income, withholding, filing requirement, prisoner status, age, filing history
• IRS locked accounts of deceased individuals – that stopped 47,000
fraudulent returns from being filed in the first two months of 2015
• The IRS now uses 196 identity theft filters (up from 114) in order to deter
identity theft fraud
• The IRS should acknowledge receiving your request in 30 days and provide
them to you in 90 days
• Direct deposits sent to one bank account is now limited to three
• Sharing of prisoner information between the federal and state agencies

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GOVERNMENT RESPONDS
• Income tax refund fraud has been proposed to have a
specific category as a felony offense
• Identity Theft and Tax Fraud Prevention Act introduced in
2013 requested the line above. 3 years to pass!
• The same bill was introduced with the same name in
2015 – it also limits the use of the social security number
(healthcare)

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COLLABORATION
• Leading tax software companies are now starting to
share 20 new pieces of data with the IRS and State
income tax agencies
• Improper or repetitive use of Internet Protocol Numbers –
the computers address from which tax returns are sent
• The time it takes the preparer to complete a return

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STATE TAX REFUND FRAUD
• Each of the 43 states approach income tax refund fraud
differently
• Identity based state income tax refund fraud is up 3,700
percent. – Lexis Nexis
• Everyone does not file a federal income tax return AND a
state income tax return. States cannot check a federal
filing if one has not been filed.

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STATE OF OHIO
In 2014 (filing year 2013)
in the State of Ohio,
90% of all fraudulent income tax returns were blocked…
…criminals were still able to
steal $28,000,000 -
1.5% of all income tax refunds

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STATE OF OHIO TAX FRAUD
• 2013 Ohio Identity Theft Returns Filed – 64,000
• 2014 Ohio Identity Theft Returns Filed – 168,000 (8/31)
• 2012 Ohio Identity Theft Return Claims - $10M
• 2013 Ohio Identity Theft Return Claims - $277M
• Filing year 2014 “The Quiz” is implemented
• 2014 Ohio Identity Theft Return Claims - $160M

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OHIO REFUND QUIZ
• Implemented in 2015 (2014 tax filing year)
• $3.5M contract with LexisNexis Risk Management Solutions
• Four questions for cash refunds and refunds credited
• 10% flunked - modifications were made.
• Questions were asked about ex-spouses, former homes, old
vehicles amongst other pieces of data.
• The Ohio Legislative attempted to limit questions obtained
from information to the most recent five years. This line item
provision in the budget was vetoed by Gov Kasich.

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STATES FIGHT BACK
• Improved databases and systems including identity theft filters
and tax return qualifiers
• Cross matching and using external databases such as the
Social Security Administration Death Master File, Internal
Revenue Service, Federal Trade Commission and United
States Postal Service.
• Quizzes
• Delayed income tax refunds = less fraud and > unhappy
taxpayers (and CPAs) > unhappy elected officials.
• Delayed refunds are costing states interest required to be paid
to taxpayers for slow refunds.
• States require resident notification of suspected data breaches
• Possessing someone else’s personal information without
cause is now a crime in some states

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ALABAMA
• 1,850,000 returns were filed in 2014
• Less than 1,100,000 were
processed by August
• Alabama pays 3% interest on
unpaid refunds
• The 3% is a cost of doing business
these days as it is less than the
amount of money lost due to
income tax refund fraud

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NOW WHAT?
I AM A VICTIM
• Place a “Fraud Alert” on your credit reports by calling any one of the
three nationwide credit reporting companies:
 Equifax: 1-800-525-6285
 Experian: 1-888-397-3742
 TransUnion: 1-800-680-7289
• Immediately secure and review all three of your credit reports
carefully, looking for fraudulent or unauthorized inquiries or activity
• Verify your Social Security Administration earnings statement
annually
• Close any accounts that have been tampered with or opened
fraudulently
• File a police report in the city where you reside
• File the applicable affidavits with income tax agencies

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NOW WHAT?
I AM A VICTIM
• Credit freeze
• Credit monitoring
• Close and then re-open new bank accounts and/or credit
card accounts (depending on the ID Theft)
• Discuss increased bank monitoring on your checking
accounts
• File an Identity Theft Victims Complaint and Affidavit with
the Federal Trade Commission
• Document every step you take and call you make
• Never discuss your identity theft case with anyone
wherein you did not initiate the telephone call

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CREDIT REPORTS
SECURE YOUR
Inspect your credit report regularly
• You are entitled to one free report a year from each
nationwide credit reporting agency
• Online: www.AnnualCreditReport.com
• Application has been distributed
• Phone: 1-877-322-8228
• Mail: Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

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QUESTIONS?
Frank Suponcic
CPA, CFE, CFF
Partner at Skoda Minotti
(440) 449-6800
fsuponcic@skodaminotti.com