Income Tax Return Scams and Identity Theft

Abstract

This paper explores why income tax return scams are increasing at an alarming rate. Tax identity theft, unscrupulous tax preparers, and the rise in online financial activity all contribute to the problem. We examine ways income tax fraud is perpetrated. E-filing provides the basis for most fraudulent tax schemes. The IRS currently has several measures in place to counteract income tax fraud including: screening filters that flag multiple returns using the same address or the same bank account number for receiving funds, federal legislation that provides albeit weak financial privacy protection for customers, and raising public awareness. Many believe the IRS could do more. We suggest additional steps they might take to further curtail income tax fraud such as verifying tax return information before releasing refunds to taxpayers and creating an audit trail when distributing funds. Finally, we suggest how individuals can protect themselves to reduce the chance of becoming a victim of income tax return fraud.