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The IRS’s Great Leap Backwards: A Return To Paper Checks For Some Tax Refunds

As the number of people receiving their income tax return by direct deposit has grown, the number of identity thieves with an aspiration to steal those tax returns grown with it. Faced with millions lost to tax return fraud, the Internal Revenue Service has a solution, albeit a retro one–limit direct deposits and write more paper checks. Though the change won’t affect most regular taxpayers, this could amount to a major efficiency downgrade for some, particularly small business owners.

Income tax refund fraud is big business for those whose chosen line of work is identity theft. According to the IRS, the United States government loses almost $20 billion a year to such frauds, a problem that is on the rise, the report notes, with the increased prevalence of electronic filing and the direct deposit of refunds to bank accounts on pay cards.

“In today’s digital world,  fraudsters have the ability to file false returns and receive another taxpayer’s refund prior to the legitimate filing and weeks before any fraudulent activity is discovered,” said Barbara Rivera, general manager of credit monitoring firm Experian’s Public Sector, report GCN

This has left the IRS grasping for a solution, though now it seems to have found one, though one that will likely leave some users rather unsatisfied.  Going forward, the IRS will be putting limits onto the direct deposit of tax refunds, in an attempt to curb fraud.  What to do with the transactions no longer eligible for ePayments?  Good news—despite the fact that electronic filings have to 80 percent of all filings, the internal revenue service still knows how to write and send paper checks.

New Limits On How Many Deposits One Account Can Accept

According to the new regulations the IRS will limit the number of refunds electronically deposited into a single financial account or pre-paid debit card to three. All filings over that number will have to be received by a paper-check.  Tax-payers will be receive and automatic notification when they have used up their maximum number of direct deposits and taxpayers will be able to track the status of any refund, paper or electronic, the Where’sMyRefund online tool.

“The vast majority of taxpayers will not be affected by this limitation, and we would encourage taxpayers and tax preparers to continue to use direct deposit,” said the IRS noted in a released statement. “It is the fastest, safest way for taxpayers to receive refunds.”

However, there are some that will be affected.  Small business owners—who use a single account for personal and professional tax refunds—may face a situation where the tax filing system will get a little more complicated and paper-based than would be considered optimal.

Despite the inconvenience the new regulations may cause some, the IRS maintains that they are necessary to combat fraud.

“The direct deposit limit will prevent criminals from easily obtaining multiple refunds. The limit applies to financial accounts, such as bank savings or checking accounts, and to prepaid, reloadable cards or debit cards.”

An Effective Fraud Fighter?

While the new regulations may deter one specific flavor of tax return fraud, it is unclear how much of a dent the switch will make to the $20 billion problem—after all, it seems unlikely that fraudsters will opt for honest work in the face of new regulation.

Just two weeks ago, reports of a new form tax return scam making the rounds was widely reported, wherein taxpayers were contacted about a false problem with their tax return by someone pretending to work for the IRS or Treasury.

“They say you didn’t pay enough or the money wasn’t received, and the only way to remedy this and make sure nothing bad happens to you is to get money to them immediately,” Lois Greisman, associate director at the Federal Trade Commission told CNBC. “Some of them can become very threatening and very abusive.”

The fraudsters may take a credit card payment, but usually instruct victims to load funds onto a prepaid card and transmit the payment that way.  So far 20,000 vicitms have been taken for as much as $1 million by the simple, but highly effective scam.

As the IRS adapts its tactics to combat scammers and identity thieves, it seems thieves are willing to adapt back.

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