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Tax Refund Fraud Overview

There has been a significant increase in fraudulent tax refunds filed using consumers’ stolen Social Security or Tax Identification Numbers (TINs). Tax refund fraud involves identity theft, fraudulent W-2 forms and the on-line filing of a fraudulent tax return for the purpose of receiving a tax refund for deposit into the account of the fraudster or a money mule acting on behalf of the fraudster.  Variations of this fraud also include using a tax preparation firm and obtaining a refund anticipation loan with the proceeds credited to a prepaid card. 

Many victims are unaware their personal information has been used to file fraudulent tax refund until they attempt to file their own taxes and learn that:

  • More than one tax return was filed,
  • They have a balance due, refund offset or have had collection actions taken against them for years in which they did not file a tax return, or
  • IRS records indicate they received wages from an employer unknown to them.

Financial institutions can play an important role in assisting law enforcement to identify and prevent tax refund fraud as they serve as the channel for negotiating or depositing the funds, whether it is through direct deposits into DDAs or prepaid cards or through the issuance of paper checks.  While the Internal Revenue Service (IRS) has attempted to curb the increase in fraudulent filings through the implementation of new processes for handling tax returns, new compliance filters to detect fraud, and new initiatives to partner with stakeholders to investigate such crimes, financial institutions may assist by:

  • Identifying mule accounts established to facilitate fraud;
  • Identifying potential tax fraud activity, as outlined by red flags developed the Financial Crimes Enforcement Network (FinCEN) and filing Suspicious Activity Reports (SARs) associated with this activity; and;
  • Returning funds to the IRS.

Identifying Mule Accounts Established to Facilitate Fraud

To avoid detection, the fraudsters may use money mules to open recipient or prepaid card accounts to receive the stolen funds via funds transfer or ACH.  In response to U.S. financial institutions reporting an increase in accounts opened by tourists or foreign exchange students holding J1 visas for the sole purpose of transferring stolen funds received through account takeovers or fraudulently filed tax refunds, the Financial Services Information Sharing and Analysis Center’s (FS-ISAC) Account Take Over Task Force (ATO TF) created an advisory to provide institutions with red flags for identifying such accounts.

FS-ISAC ATO Task Force Advisory: Anticipated Increase in Accounts Opened by Visiting Students and Tourists to Facilitate Fraud (April 2012) 

Identifying Potential Tax Fraud Activity and Filing SARs

The Financial Crimes Enforcement Network (FinCEN) has issued several advisories to help banks identify tax refund fraud and provide banks with guidance on how and when to file a suspicious Activity Report specific to tax refund fraud.

FIN-2013-A001: Update on Tax Refund Fraud and Related Identity Theft (February 2013)

FIN-2012-A005: Tax Refund Fraud and Related Identity Theft (March 2012)

Returning Funds to the IRS

The Internal Revenue Service (IRS) and its Office of Refund Crimes encourage financial institutions to return funds issued based on fraudulently filed tax returns using the following process:

  • 1. Create a spreadsheet of the potentially fraudulent refund(s) and associated taxpayer information (SSN, tax period, refund amount, taxpayer name and address).
  • 2. Send the spreadsheet in an encrypted format to[email protected]. (Note that all taxpayer information must be sent in an encrypted format.)
  • 3. Include in the email subject line the institution’s name, date and "Return of Refunds."  (i.e.:  Main Street Bank, 4/15/2012, Return of Refunds)

The Wage & Investment (W&I) division will respond directly back to the institution within seven days with instructions on how to proceed. The Criminal Investigation (CI) division no longer processes returned refunds. W&I assumed the responsibility for receiving and processing returned refunds as a part of the transition of revenue protection work in 2009.

Absent a timely response from W&I, the institution may return the funds along with the spreadsheet containing the associated taxpayer information to the following address*:

Internal Revenue Service 
Attn: AMTAP Management 
PO Box 24012 
Fresno, CA 93779

* Overnight mail cannot be send to P.O. Boxes; therefore, funds should be sent via Certified Mail.

IRS External Leads Program and Contacts

The IRS External Leads Program is responsible for receiving and processing leads and ACH credits returned by financial institutions because the funds were deemed to be questionable. The External Leads Program, supported and managed by the IRS Accounts Management Taxpayer Assurance Program, works in conjunction with IRS Submission Processing to receive questionable leads, screen and validate leads, and then request the recovery of refunds to reconcile accounts.

The External Leads Program has partnered with FMS to implement an electronic method for returning funds to the IRS using the Credit Gateway System which will allow for a more timely, efficient and safe transfer of funds. FMS Credit Gateway is able to process Automated Clearing House (ACH) and Fed Wires for federal agencies, but the IRS focuses on receipt of ACH credits only.