Security & Fraud

It’s Tax Season — And Fraudsters Are Feasting

One of the positive (or at least most promising) projects in the push toward more digital forms of payment and commerce concerns taxes — specifically, bringing more efficiency to a process that many consumers and businesses already consider a nightmare of paper-based bureaucracy.

However, that opportunity for legitimate operators in the 21st century digital economy is also an opportunity for criminals who see an easy path to profit via the filing of fraudulent tax returns, a type of theft that can be horrifyingly easy, but prevented with foresight and online protections.

In honor of the big tax deadline approaching in the U.S., PYMNTS caught up with Zac Cohen, general manager at Trulioo, a verification and fraud prevention services provider, to get a better handle on fraudulent tax returns — a problem that resulted in at least $1.6 billion worth of theft in 2016, according to the latest IRS figures. Sure, the federal agency said it stopped some $10.5 billion worth of tax return fraud that year, but the problem is clearly a significant one, and the threat (which is not just limited to the U.S.) promises to keep growing as digital processes come to the tax-filing-and-return space.

“As tax returns become more and more digital, that is creating openings for bad actors to take advantage of,” Cohen told Karen Webster during the PYMNTS interview.

Tax Return Scams

The tax refund scams typically involve criminals using someone’s real Social Security number and other parts of their personal data to file a fraudulent tax return online. The rise of online tax filing services, combined with personnel reductions among auditors at the IRS, is making it easier for criminals who know what they are doing to steal that money, Cohen said. Those criminals also create fraudulent W2s and other forms that go with those filed returns. That may take some time and expertise, but the returns are worth it, as the IRS figures show.

One of the keys for those criminals is not just data and persuasive documentation, but speed, according to Cohen.

“They file their tax returns early on,” he said. “They beat you to it” — the “you” refers to legitimate filers. Some of these criminals are so confident in their skills, or at least sure enough that a reduced headcount at the IRS provides strong odds against an audit or detection, that they have “used the same four addresses for over 300 tax returns. It sounds amazing, but it’s happening.”

Tax Fraud Impacts

Make no mistake, this type of fraud not only targets individual consumers, but businesses as well. Even if an individual is not specifically targeted, the nature of taxes and the tax system produces what the English majors at PYMNTS will describe as a “for whom the bell tolls” effect — no one is isolated when it comes to taxes. A stolen or lower-than-expected payment in one part of the system tends to result in higher tax responsibilities for other legitimate participants, for instance. Fraud here can later produce impacts there, even if years later. (Ask not whose taxes were stolen. In the end, the theft was from all of us.)

That, of course, is not the only result of fraud. Consumers and businesses miss out on timely, needed refunds. Fines are put into play. Legal fees are incurred. Frustration and headaches are almost certain to arise. “You can lose your credit rating, and create a huge amount of debt,” Cohen said.

“It’s a data problem and process, and technology challenge,” Cohen noted of the hurdles faced when trying to combat tax return fraud. That may sound daunting (and, as Cohen told it, should sound that way), but it doesn’t mean preventative efforts are impossible or even out of reach.

Verification Code Defense

One such effort highlighted by Cohen includes W2 verification codes, “which you submit back as part of your tax return,” verifies that the person on the other end has a legitimate W2 and confirms they are the legitimate filer of that particular tax return. The code is “not mandatory yet,” he said, but it does offer an idea about how digital technology can help solve a problem that’s apparently being made worse by the spread of digital tax filings.

In addition, digital tools keep emerging in the verification and fraud prevention space that could make it harder for criminals to file fraudulent returns. After all, it’s not likely that the progress made on bringing tax filings and returns into the digital sphere is going to stop, or even reverse.

Yet, that work needs to happen sooner rather than later — at least, in the view offered by Cohen. “There is no better time to do it than now,” he said, as digital processes related to tax filings and refunds are gaining ground, and best practices are emerging. “The tech and the tools are available.”



The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.