How Payments is fighting identity theft tax refund fraud

Paul Landry | Tax fraud and prepaid | 4/25/2016 1:19 PM

Everybody likes getting a tax refund.

Well, everybody except those who’ve become the victims of identity theft tax refund fraud. Their refund never gets to them. In 2013, easily stolen personal data and loopholes in the IRS processes cost the government nearly $6 billion in refund payments that were later determined to be fraudulent. These are billions of dollars of refunds that never made it back to the original taxpayer. Now just imagine if that taxpayer was you…

Identity theft tax refund fraud is a crime that has exploded in the past few years, especially as more and more people are receiving their refunds on prepaid cards. And it’s easy to see why.

Luckily, the payments industry, the IRS, and the NBPCA are joining forces to fight back against ID theft tax refund fraud. We in Payments really need to take the lead. No one is going to know our business as well as we do – we’re closest to it. It is, after all, our payments system. We have the responsibility to make sure that the people using our system can have faith we are doing everything we can to insure its integrity. 

The first opportunity to stop a fraudulent return is when it hits the IRS (by the time the refund gets to a card, we’re already playing from behind, looking to catch the perpetrator.) We have to accept the fact that the IRS collecting four data elements and validating them against a data base isn’t going to work anymore. Our (the public) information is too available. Using technology to create strategies for identification is the key. There are some companies doing some great work out there, creating more tools for us to detect and investigate potential fraud or abnormalities. Since we’ve begun working directly with the IRS, there has been tangible success in identifying and stopping fraud, as evidenced in the trending decrease in fraud returns that we have sent back to the IRS through the Bank Leads process.

Still, there are some people who think that tax refunds shouldn’t be loaded on to prepaid cards AT ALL. In fact, they’re going as far as proposing legislation that would classify prepaid as an “at risk” account that would require an in-person ID in order to be set up. Restrictions such as these would cause an avalanche of people receiving paper checks, which is inconsistent with the Government’s objectives - and think of the corresponding indirect costs associated with cutting those checks. Paper checks also eliminate the paper trail and any opportunity we would otherwise have in the monitoring of spending patterns relative to location and overall account history. 

What it really comes down to is that legislating a prohibition of tax refund payments to prepaid cards doesn’t address the all-too-important need for the increased verification measures at the point of the initial tax filing, which takes place long before the payment distribution method is taken into account. This is where solving the problem needs to start. I would encourage everyone to look at the GAO report on Tax Refund Fraud - the majority of the solutions identified were related to timing of processing income tax returns and funding to update the IRS’ systems.

The perpetrators of fraud are going to continue to evolve and look for new methods to cheat the system - that’s their job and we can’t stop them. The Payments industry just needs to continue supporting the innovations that can prevent fraud –  that’s our job. We just need to do ours a lot better than they do theirs.

The opinions, findings, or perspectives expressed in this content are those of the author and do not reflect the official policy or position of The Bancorp, Inc., its affiliates, or its or their employees.