3 Ways to Reduce Tax Refund Fraud

August 26, 2015 | By: Matt Robinson

tax fraud preventionConsumers and the IRS continue to grapple with the reality of tax refund fraud as the tax season continues. Tax refund fraud is attractive to many scammers because it’s hard to catch the perpetrators. Earlier this year, TurboTax even had to shut down for a short time due to a massive refund scam.

As tax identity fraud and refund fraud become more prevalent, the government is trying to figure out what to do. The United States Senate Committee on Finance recently held a meeting about ways to protect taxpayers from scams. Some of the suggestions deal with the process and could be implemented without too much trouble. Here are 3 ways that could be used to combat tax refund scams and fraud:

1. Better Consumer Education

First of all, better consumer education is needed. According to the IRS, one of the biggest scams this year is a phone scam. Callers posing as IRS agents call and scare taxpayers into giving personal information, or into taking some other action.

However, the IRS won’t make contact via phone in this manner. Initial contact is made through the United States Postal Service, so you can hang up the phone when you get a phone call claiming to be from the IRS. Similarly, the IRS won’t send an email asking you for personal information or notifying you about a problem.

Better consumer education about the ways the IRS contacts taxpayers is necessary so that people stop being fooled by scammers and fraudsters.

2. Earlier Document Filing Deadlines

Right now, your employer is supposed to send you tax information by the end of January. Whether it’s a 1099 or a W-2, you are supposed to receive the information relatively quickly. However, that doesn’t mean that the IRS is getting the information that early. In fact, employers aren’t required to send this information until March 31. This means that many people have already filed their paperwork. It’s difficult to confirm correct information with this state of affairs. A fraudster could claim a large refund in your name, but there wouldn’t be anything to compare it with because the paperwork from the employer hasn’t been filed yet.

There are members of the Senate Finance Committee that would like to see earlier filing deadlines for these documents so that it’s possible to cross-check information before refunds are issued.

3. Identify Debit Cards Better

Another issue is the fact that it’s practically impossible to distinguish a debit card from a bank account. Many taxpayers choose to have their refunds directly deposited onto a prepaid debit card. When entering this information on a tax return, though, it looks like a “regular” bank account. Scammers can use this to their advantage. They enter a prepaid debit number, and the money is sent to their card — and it’s easy to transfer, use, and practically impossible to trace. One of the suggestions is to create some sort of new routing number or another identifier that indicates a debit card. That way, it would be easier for the IRS to red flag certain transactions.

There is a lot to think about as increasingly sophisticated methods of scamming come into vogue and influence tax return outcomes.