Is E-Filing to Blame for Uptick in Tax Identity Theft?

In the past several years, the number of incidents of identity theft related to consumers’ tax returns has surged, and there seems to be little the Internal Revenue Service can do about it. Now, some experts say that a major reason for this increase in fraud could be the result of the agency’s e-filing option.

The ability to submit one’s taxes online is a major convenience for both Americans across the country who may fret every filing season, as well as the IRS itself, which can handle the hundreds of millions of submissions it receives every year more expediently, according to a report from the Wall Street Journal. But all that ease of use can also pose a major problem for taxpayers because it opens the door for identity thieves to more quickly get in and out of the system when they try to commit fraud.

Last year, 80 percent of consumers filed their tax returns online, and that’s a major help to the IRS since it allows for quicker responses to potential issues within the three-year window for audits to take place, the report said. But that fast turnaround makes it easier for identity thieves to get away with their crimes because of the way the system pays out on refunds.

When a criminal is armed with a person’s real name and Social Security number, as well as bogus W-2 or Schedule C forms, pushing a tax filing through isn’t all that hard, the report said. And because e-filing allows for payouts to anonymous prepaid cards, a criminal may be able to receive significant fraudulent funds in short order, and potentially get away with the crime more easily. For instance, one such transaction made in Oregon in 2011 allowed for a criminal to report false wages of $3 million, and receive $2.1 million in refunds from that state’s Department of Revenue.

Further, though the process of committing identity theft through e-filing can be easy, correcting the issue can be difficult, the report said. The IRS currently cautions that an investigation into claims of fraud can take more than a year, and it’s currently dealing with a backlog of more than 650,000 cases.

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Identity theft can affect not only people’s taxes and finances, but also their overall credit standing, depending upon what sensitive data a criminal has access to.

Image: 401(K) 2012, via Flickr