by Amy Kleinschmit, Director of Compliance

Tax time is nearing and with that is the increased threat for tax refund fraud.  In November 2012, the U.S. Government Accountability Office issued a report on the Total Extent of Refund Fraud Using Stolen Identities is Unknown, which can be found here: http://www.gao.gov/products/GAO-13-132T.

The full extent and nature of identity theft-based refund fraud is not known, but IRS data indicate that it is a large and growing problem.  For example in 2008 there were 47,730 tax-related identity theft incidents that were identified by IRS, in the first 9 months of 2012 alone, the IRS had identified 641,690 incidents.  The report noted that “In some cases, external entities, such as banks or other agencies, may notify IRS of potential refund fraud, including suspected identity theft-based refund fraud.  IRS reported it had received information from 116 banks and external leads on more than 193,000 accounts between January 1 and September 30, 2012, for all types of refund fraud.  IRS reported that banks and other external entities returned almost $754 million dollars during this period. These cases are ones where fraudulent returns passed through IRS processes and refunds were issued.”  

Unfortunately this is not just a crime occurring in the big cities, it is occurring right here in the Dakotas too.  In November 2012, it was reported that, “Authorities say a total of nine people used stolen identities to file bogus tax returns…The South Dakota U.S. Attorney's Office says the IRS paid the nine defendants about a half million dollars in fraudulent tax returns before investigators broke it up.” Six Current, Former USD Athletes Charged, Ben Dunsmoor, November 16, 2012 Keloland.com

Last year FinCEN issued advisory FIN-2012-A005 on the topic of Tax Refund Fraud and Related Identity Theft, and can be found here: http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2012-A005.pdf

As the advisory explains, “financial institutions are critical in identifying tax refund fraud because the methods for tax refund distribution - direct deposit into demand deposit accounts, issuance of paper checks, and direct deposit into prepaid access card accounts - are often negotiated and deposited at various financial services providers.  The number of tax refunds being distributed via direct deposit has increased significantly over the past several years and continues to increase yearly.  As such, financial institutions may see tax refund fraud activity complement this trend and related suspicious activity may be more connected to direct deposit transactions.” FIN-2012-A005 The advisory provides a number of “red flags” that credit unions should be on the lookout for and guidance in filing SARs if you do suspect tax refund fraud. Some of the “red flags” include:

 ·       “Multiple direct deposit tax refund payments, directed to different individuals, from the United States Department of the Treasury (Treasury) or state or local revenue offices are made to a demand deposit or prepaid access account held in the name of a single accountholder.

·       Business accountholders processing third-party tax refund checks and conducting transactions inconsistent with normal business practices, which may include:

o   Large volume of Treasury refund checks or bank checks being deposited in contrast to few other checks being deposited, such as payroll checks;

o   Large volume of refund checks bearing addresses of customers out of state;

o   Multiple refund checks are for the same dollar amount or a few dollars off;

o   Treasury refund checks or bank checks, representing electronic refunds, are sequentially numbered or within a few numbers of each other;

o   The dollar amount of checks being deposited is not commensurate with the amount of currency being withdrawn to cover the cashing of these refund checks.”

Also, keep in the mind that according to IRS guidelines, specifically the 1040 tax form instructions, reasons that the direct deposit request may be rejected include “You request a deposit of your refund to an account that is not in your name (such as your tax preparer’s own account).”  Also, taxpayers cannot use IRS Form 8888 “Allocation of Refund” to split tax refunds into accounts that are not in the name of the same taxpayer.  The IRS addresses this topic in the “Frequently Asked Questions about Splitting Federal Income Tax Refunds” by answering the question “Can I direct part of my refund into my tax professional’s checking or savings account to pay my tax preparation fee?  You can direct your refund to any of your checking or savings accounts; you cannot direct your refund to someone else’s account (except for your spouse’s account, if this is a joint refund).”  

Additional FAQ regarding splitting tax refunds can be found here: http://www.irs.gov/Individuals/Frequently-Asked-Questions-about-Splitting-Federal-Income-Tax-Refunds

Should you have any questions or concerns, please do not hesitate to contact Amy Kleinschmit at akleinschmit@cuad.coop or 701.214.9721.