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AML/CFT

How Can You Protect your Clients from Tax Refund Fraud?

Abrigo
January 24, 2018
Read Time: 0 min

Tax return fraud is a growing threat

Tax season is here. Monday, January 27th is the first day the IRS will begin accepting electronic tax returns. With more than 155 million individual tax returns expected to be filed in 2020, the threat of tax refund fraud is on the minds of consumers and financial institutions alike.

Instances of tax refund fraud saw an upsurge in the mid-2010s. In 2015, CNBC cited an IRS prediction for tax return fraud to hit $21 billion in 2016, up from just $6.5 billion in 2013. However, the IRS put new initiatives in place to combat tax refund fraud in 2017.

Some of the expanded protections/changes the IRS put in place last year include:

  • sharing new data elements from tax returns,
  • sharing new data elements from business tax returns,
  • creating a new program between states and the financial industry,
  • expanding the Form W-2 verification code initiative,
  • continuing to enhance software password requirements for individuals and tax professional users.

Protecting your institution against fraud isn't a seasonal job.

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How can financial institutions prevent tax fraud?

Regardless of these changes, the threat of fraud still lingers. Everyone has a role in protecting taxpayers' data, including financial institutions. We know that fraudsters are always coming up with new ways to outsmart technology, so financial institutions must remain diligent to protect their stakeholders during tax season. So what can financial institutions do to flag and prevent tax refund fraud?

"Fraudsters see tax refund fraud as a means to easy money," said Michelle Florez, Product Manager at Abrigo. "The most important thing a financial institution can do to combat this type of fraud is to educate their clients on the different scams out there so that they don’t become victims. Most forms of tax refund fraud are due to some type of identity theft. The best defense is a good offense."

FinCEN issues red flags for catching tax ID fraud

In the past, FinCEN has issued advisories on red flags that may indicate tax refund fraud. According to FinCEN, some red flags that financial institutions can look for include:

  • Multiple direct deposit tax refund payments, directed to different individuals, from the United States Department of the Treasury (Treasury) or state or local revenue offices are made to a demand deposit or prepaid access account held in the name of a single accountholder.
  • Suspicious or authorized account opening at a depository institution, on behalf of individuals who are not present, with the absent individuals being accorded signatory authority over the account. The subsequent deposits are comprised solely of tax refund payments.
  • A single individual opening multiple prepaid card accounts in different names, using valid TINs for each of the supplied names and having the cards mailed to the same address. Shortly after card activation, Automated Clearing House (ACH) credit(s) from Treasury, state or local revenue offices, representing tax refunds, occur. This is followed quickly by ATM cash withdrawals and/or point-of-sale purchases. (Click here to read the full FinCEN advisory and additional red flags.)

A robust BSA/AML and Fraud detection system makes it easy to flag and investigate the potentially suspicious tax-related activity. Within BAM+ for example, the ACH Fraud Scenarios look for accounts that are receiving multiple ACH payment items from the government.

During this time of year, tax refund fraud is a huge threat. The IRS has put measures in place to help curb the instances of tax refund fraud, but financial institutions still play a part in protecting consumer data.

Learn more about how the solutions from Abrigo can help you identify and report suspicious activity, such as tax refund fraud. 

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About the Author

Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo’s platform centralizes the institution’s data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth. Make Big Things Happen.

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.