A Two-Pronged Approach to Combating Identity-Based Income Tax Fraud
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The District of Columbia government has no way of knowing how much it was defrauded for last tax season. And that’s alarming since it stopped $36 million in bogus refunds.
The District of Columbia's Office of Tax and Revenue stopped more than 20,000 fraudulent tax returns worth about $36 million in 2015.
In the event of identity-based income tax fraud, if the victim can prove their identity, which can take a while, the D.C. government ends up paying refunds twice—with the one sent to the criminal almost never recouped.
Perpetrators based outside the U.S. are difficult to trace. Domestically, they use anonymous debit cards that can be purchased at places like CVS without having to provide personal info. So they can’t be traced beyond the card.
“What we don’t know is what we didn’t stop, but we know that we missed a lot,” said Stephen Cordi, D.C.’s deputy chief financial officer. “That’s anecdotal because of the cases where the real taxpayer came behind and filed their return.”
This tax season, the District’s government is implementing two new programs to protect the identities of its residents.
Centennial, Colorado-based Fast Enterprises’ fraud management software solution works with the District’s data warehouse of information from employer W-2s, driver’s licenses and voter registrations to analyze tax returns and score them for fraud potential. Taxpayers whose returns score high receive a letter from the Office of Taxation and Revenue requiring additional documentation to confirm their identities like a copy of their driver’s license or a utility bill.
Even if a return passes through fraud management one day, it must still go through LexisNexis Risk Solutions’ Tax Refund Investigative Solution the next.
Identity-based income tax fraud only started getting attention five years ago, around the time LexisNexis developed TRIS now used by states like Indiana and Alabama. The Dayton, Ohio-based publishing company’s national identity confirmation database contains broader information used to detect fraudulent returns, like when the same Social Security Number is used by multiple people or a listed address doesn’t match historical record.
Cities can also establish specific system rules so TRIS flags, say, a person’s second refund request that tax season.
“D.C. doesn’t have a complete view of the people who are asking for tax refunds because people are moving in and out all the time, so there are quite a few first-time filers,” said Andy Bucholz, LexisNexis Special Services’ government solutions vice president. “It’s not uncommon to have no information on a person in the system, but they want to refund quickly.”
Starting in July, OTR began sending letters to taxpayers flagged by TRIS asking them to call an 800 number or visit a web portal and take a four-question identity confirmation quiz about information only the real person would know. Questions might ask about a previous car the taxpayer owned, a former place of residence or how many siblings they have for automatic identity verification.
Residents get a second chance to take the quiz if they fail the first time but will have to show up to OTR in person with proper identification if they fail that one as well. Otherwise the taxpayer passes, and their refund is released the next day—taking 10 to 14 days to arrive if they filed electronically.
This year only, D.C. is defaulting every new request to paper check to cut down on the number of refunds sent to debit cards. That way the city has a “fair chance of getting it back,” Cordi said, if a person receiving the check recognizes it’s not his or her refund.
“Chances are a person in the District, if they help themselves to a check in that way, we can pursue that,” he said.
D.C. lost 100 percent of those kind of refunds last year—income tax fraud the most popular identity fraud crime. Many agencies were caught unaware because they were used to decades of people verifying their identities in person for benefits, when they took their services online.
“The vast majority of government agencies put no fraud tools in place to authenticate the people coming in online,” Bucholz said. “They’ve never been frauded like this before because they had the brick-and-mortar building.”
Now hacking has skyrocketed and governments are being defrauded by terrorists and gangs trafficking drugs and sex. Since 2012, LexisNexis has stopped about $500 million in fraudulent tax refunds across all its government clients.
Next tax season, District taxpayers will be able to change bank accounts through Fast Enterprises and receive a PIN number that lets them authenticate direct deposit.
Any requests for identifying documentation must be looked at manually, which can take up to 60 days.
“We understand it’s inconvenient to some taxpayers, and it’s regrettable,” Cordi said. “But we can’t blindly be sending checks to debit cards across the world.”
Dave Nyczepir is a News Editor at Government Executive’s Route Fifty.
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