By its very nature, tax season unleashes a certain amount of angst, but this year may produce a higher level of foreboding due to a slew of data breaches that have imperiled electronic filing of tax returns.
"Tax fraud this year is very prevalent, primarily because of these recent high-profile data breaches," said Julie Miller, a spokeswoman for Intuit, a Mountain View software maker whose signature products include the TurboTax program. "We are seeing tax refund fraud being driven by identify theft. That has implications for people who use TurboTax online or any online tax preparation."
Scammers are using social security numbers and other information collected in data breaches to steal a person's identity and file for their tax return. Frequently, the first time that a taxpayer becomes aware that their data has been compromised is after they file their return, are waiting for a refund, and receive a notice from the IRS that somebody has already filed their tax return.
"Going back to at least 2012, tax refund fraud is the biggest category of identify fraud reported to the Federal Trade Commission," said John Breyault, a vice president with the National Consumers League. "We are very concerned about the connection between identify theft and tax fraud. There is no foolproof way to avoid this -- That's why it's such a popular crime."
In 2014, more than 1,500 data breaches led to 1 billion records being compromised worldwide, according to a recent report by Netherlands-based Gemalto, a data security firm. That represented a 49 percent increase in data breaches and a 78 percent increase in the number of records that were lost or stolen worldwide, Gemalto reported in its Breach Level Index for 2014.
"Maybe the worst incident was the huge Anthem data breach," said Paul Stephens, director of policy and advocacy with the San Diego-based Privacy Rights Clearinghouse, a nonprofit group. "That breach provided sufficient info that anyone could file a tax return for any individual whose data was compromised."
Potential security issues aren't stopping most Americans from filing their taxes electronically, though. The IRS said that 86 percent of federal tax returns were filed electronically last year, after steady gains in the past decade: 2005 was the first year the majority of returns were filed online, at 51.1 percent.
With so may Americans e-filing, federal tax authorities have identity theft on their radar screens in a big way, Breyault said, but tax scam crooks have begun to prospect in promising new territory.
"Tax fraud is migrating to state returns," Breyault said. "It's like squeezing a balloon. You squeeze harder on one end, and the problems get bigger at the other end."
Intuit was forced to shut down TurboTax service for almost 24 hours in February -- just a day after the Anthem hack was originally reported -- when states complained to the company about a large number of fraudulent returns. The company worked with Palo Alto security startup Palantir to develop security procedures to block such filings.
"This year on TurboTax, we have included additional account and security methods, such as multi-factor authentication when you log in," Miller said. "If you are an existing customer, you will have additional fraud controls in place to protect your information."
Experts say the hazards posed by tax fraud thieves are acute enough that they urge people to file their returns as early as possible during the tax season, especially if a taxpayer anticipates a refund.
"These thieves are really smart, and really crooked," said Kevin McCormally, editorial director with Kiplinger's, a financial publication. "The IRS says that in 2013, it paid out $6 billion in fraudulent returns."
Fraud activity is pernicious enough that Kiplinger's has even offered a draconian suggestion to help ward off the tax crooks: Try not to receive a refund.
"You can fix your withholding so you don't get a refund," McCormally said. "It's better to get your money when you earn it, rather than give it to the IRS interest free."
Kiplinger's offers a calculator on its website so you can craft a guesstimate about how many exemptions to take in order to break even or owe a small amount to the IRS on your income taxes.
The IRS recently convened an industry summit to address the issue of the cyber breaches and launch a system of industry standards and data reporting, a group that included Intuit, Miller said.
"Clearly this will be an ongoing effort to fight tax fraud and continue to evolve our security measures as the bad guys get smarter," Miller said.
Contact George Avalos at 408-859-5167. Follow him at Twitter.com/georgeavalos.
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