IRS, states and tax firms target stolen-identity refund fraud

Identity thieves should have a tougher time nabbing refunds when tax filing season opens early next year, based on six months of effort among tax agencies and tax industry businesses.

The Internal Revenue Service said Tuesday that 20 tax industry “players” and 34 states have signed on to its effort to cooperatively battle identity theft. It means, for example, collecting 20 bits of data to validate taxpayers’ identities as they file tax returns electronically.

The information will be available to the IRS and state tax agencies, which can then ferret out and stop false refunds from heading out the door.

Thieves have used stolen identities to submit false tax returns and collect refunds before the victims file. Victims learn of their plight when they try to e-file and learn of the earlier fake filing.

“We’re breaking new ground in the battle against stolen-identity refund fraud,” IRS commissioner John Koskinen said in an conference call with reporters. “We want everyone to know they can expect more protections than ever when they file their taxes next year.”

Tuesday’s session offered an update on the progress of multiple groups that have been meeting since March to tackle various aspects of the problem.

Taxpayers will see little change directly, as much of the work will be among state and federal revenue services, tax preparation companies and other financial service providers that have joined the effort.

Programmers are working now on systems that will collect those 20 new data points as e-filers complete and submit their taxes. Koskinen said he would not share all 20 points to keep thieves guessing, but he offered a few examples.

Systems will detect the Internet address the e-filer uses, as well as the identity of the device used to submit the tax return. This helps when one address or one device submits many returns.

Systems also track how long it takes an e-filer to prepare the return. Rapid work would suggest the returns were being auto-generated by machines rather than taxpayers.

Next month, the tax agencies and companies plan to start a campaign to educate taxpayers about the changes coming and their role in preventing identity theft.

Businesses will add security questions and other validation processes to tax software to test the filer’s identity and the device being used. Koskinen said these would be similar to verification efforts that banks and other online financial service providers use now.

Taxpayers particularly need to safeguard personal information, said Brad Smith, chief executive of Intuit, the maker of TurboTax.

“Treat it like cash; don’t leave it lying around,” Smith said.

The group plans to continue its efforts to strengthen the tax filing process in future years.

“It won’t be accomplished in one season, which is why we’ve already begun planning for the future,” Tom Gerke, chief legal officer of Kansas City-based H&R Block, said during the call.

Mark Davis: 816-234-4372, @mdkcstar