Individual Income Tax Insights: ‘You’re a Fraud!’ —States Dealing with Income Tax Return Scams


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Income tax refund fraud is a major problem. The Internal Revenue Service identified 42,148 tax returns that claimed a grand total of $227 million in fraudulent refunds, according to a March 2016 audit report. For taxpayers in the 42 jurisdictions who also have to file a state or district return in addition to a federal return, the potential for being a victim of income tax return fraud is doubled. 

Typically, fraudsters get a hold of someone’s personal information and then use that information to file a fraudulent return on the person’s behalf in order to receive the refund check. “[S]cammers are eager to steal personal information, including Social Security numbers, to file bogus claims for tax refunds,” Nonie Manion, New York’s Acting Commissioner of Taxation and Finance warned in a Feb. 22 press release.

This raises the question: “What can taxpayers do to protect themselves from being victims of fraud on their state tax return?” The simple answer is be careful with their personal information.

The New York State Department of Taxation and Finance Feb. 22 press release details some prevention tactics for taxpayers. Included in the list are not falling for aggressive phone scams and phishing schemes and using secure internet connections. New York also advises taxpayers to file early to prevent scammers from using their identity get fraudulent returns.

States are also now taking steps to help thwart attempts by fraudsters looking to cash in on phony returns. Typically, these measures involve delaying tax refund payments in order to give the state more time to verify the authenticity of taxpayer’s identity, as detailed by Bloomberg BNA’s Jequetta Byrd.  For example, some states are now asking filers to provide their driver’s license to help confirm the filer’s identity, according to The Pew Charitable Trusts; verifying this extra information may contribute to increased refund delays.

With these added preventions, we will have to see whether this year’s total number of fraudulent claims is reduced.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What precautions should taxpayers and states take to help detect and prevent payment on fraudulent income tax returns?

For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library.