Identity Theft Tops List of Tax Scams

Published: Tuesday, 17 Apr 2012 | 4:51 PM ET
By: Scott Cohn
CNBC Senior Correspondent



For Angela Beasley of Miami, tax time seemed especially promising this year. After doing her taxes with Intuit’s popular TurboTax software, she found she was due a refund of nearly $5,000.

Anxious to get the money as quickly as possible, she paid the extra fee to file her return electronically. Then, she clicked “send.” After a delay, she said, an unusual message popped up on her screen:

“Your transmission didn’t go through,” it said. “A tax return with the same Social Security number has already been submitted — in other words, it appears you’re trying to e-file the same return twice.”

She says she was not quite sure what had happened until she went to work the next day and learned that many of her co-workers had had the same experience. Read how the US taxes for expats and nomads work.

Beasley and her colleagues are among the nearly half-million taxpayers since 2008 who have been victims of identity theft.

“It feels like you have no control over what can happen with your finances or your personal information. Like you have no control over anything and that anything can happen to you,” Beasley said.

With most returns now filed electronically, all it takes is a Social Security number to file a return and claim a refund. And since many companies that provide electronic filing services offer instant refunds in the form of debit cards, fraudsters can be spending the money within days.

The IRS puts identity theft at the top of its “Dirty Dozen Tax Scams” for 2012. As of January, the agency had active identity theft cases in 22 states, and said its fraud filters caught 262,000 fake returns in 2011 compared with just 49,000 in 2010. But authorities know it is just the tip of the iceberg.

In Tampa, Fla., one of the earliest places where the fraud showed up, authorities say drug dealers and other hardened criminals have turned to tax identity theft instead because it is so easy, is far less risky, and, they apparently think, victimless.

“I’ve never seen individuals involved in a specific type of a crime that so readily admit what they’re doing. They don’t see anything wrong with it. Taking the government’s money is not wrong in their eyes,” said Tampa Police Chief Jane Castor, whose department has made several big arrests, including a sweep last fall dubbed “Operation Rainmaker,” in cooperation with the U.S. Secret Service and Postal Inspectors.

The operation netted 49 arrests, and authorities say it intercepted $100 million in proceeds from the fraud. But Castor says since then, the fraud has only grown.

“We thought that Operation Rainmaker may have slowed this down somewhat, but all indications are it is worse this year, 2012, than it was last year,” Castor said.

Nationwide figures appear to bear that out. The Federal Trade Commission, which is the main U.S. agency monitoring identity theft, says complaints in the category that includes tax refunds have doubled in the past two years.

On this tax day in New York, Manhattan District Attorney Cyrus Vance Jr. announced the indictment of a dozen defendants who allegedly set up a fake job placement web site in order to get Social Security numbers and other identifying information from some 300 victims. They are accused of using that information to obtain more than $450,000 in refunds from the IRS.

By targeting the unemployed, authorities allege, the defendants were able to garner a pool of individuals less likely to have earned income to report to the IRS. That way, returns filed in their names were less likely to raise suspicion.

Elsewhere, authorities have found “cheat sheets” in jails, where criminals share information about where to get Social Security numbers and how to best pull off the fraud.

For victims like Angela Beasley, finding out that her electronic tax form would not go through has been only the beginning of a long and frustrating ordeal.

She says she started with the IRS, which told her to file a return by mail, along with Form 14039, an identity theft affidavit. Then, she says, she was told to call the police.

“I called my local police office, they directed me to call another local police office. I called them and they said, ‘No we don’t take those reports, we don’t report that particular identity theft because it’s so rampant and it’s happened to so many people,’ that they’re overwhelmed and they can’t even deal with it, just call the IRS. But the IRS then asks you if you have a police report,” Beasley said.

Beasley says she has been told it can take anywhere from six months to two years to get her refund back. But that is just the first of her concerns.

“If I made $50,000 and this person has submitted a record to the IRS that I’m making $75,000 a year and threw me into another tax bracket … if I was applying for a student loan or maybe discounted health care this could probably affect me,” she said.

Beasley has channeled her frustration into a blog, “Hacked by TurboTax,” though she acknowledges TurboTax is not to blame for her situation — something a TurboTax spokeswoman is quick to point out as well.

“The blog title is clearly misleading,” Colleen Gatlin wrote in an e-mail to CNBC. “TurboTax has not been hacked nor have identities been stolen from TurboTax at any time.”

Nonetheless, she said, the company is working closely with the IRS to detect and prevent fraud in the face of a “marked increase” in the activity this year.

Castor says it is up to the IRS to tighten its systems. “We can’t investigate our way out of this,” the Tampa Police Chief said.

The IRS says it is working on it. “The IRS takes this issue very seriously and we continue to expand on our screening process in order to stop fraudulent returns and protect innocent taxpayers,” the agency said in a statement.

The agency says it stopped $1.4 billion in refunds from being sent to identity thieves last year, and it is working to speed up the process of resolving cases, a situation complicated by strict privacy laws surrounding tax returns.

The main federal agency dealing with identity theft is the Federal Trade Commission. But by law, the IRS is prohibited from sharing information about individual tax returns — fraudulent or not — with the FTC.

Legislation pending in Congress would toughen penalties for tax return identity theft and broaden the definition of victims, but protect your online identities. Guard your Social Security number, and beware of so-called “phishing” scams, where criminals attempt to access your personal information through official-looking e-mails.

The IRS has posted a list of tips here.

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