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Financial Institutions Try to Control Identity Theft-Related Tax Fraud

April 8, 2013

Banks and other financial institutions are beginning to work more closely with the Internal Revenue Service and law enforcement authorities on safeguarding taxpayers from identity thieves who steal tax refunds.

The problem has become more prevalent in recent years, according to Ben Knieff, director of global fraud product marketing at fraud prevention software provider NICE Actimize.

“Four or five years ago it was not particularly prevalent,” he said in a phone interview last week. “We’ve seen quite a strong increase in the last few years. The IRS is quite interested in how to reduce the incidence and make it more difficult for a criminal to perform this style of fraud while at the same time trying to maximize the convenience for the general public. Clearly there’s substantial cost savings for the IRS as well as for all of us taxpayers to be able to file tax returns electronically and not have paper so much in the process. It’s very much like the challenge that a bank faces in trying to balance making things more convenient for the vast majority of people who are not trying to commit a crime and make it inconvenient for the small number of people who are trying to take advantage of the system.”

The IRS is working to increase its ties with law enforcement to combat the identity theft problem, as well as partnering with financial institutions that are in a position to spot fraudulent-looking activity. “As with so many forms of fraud, when all of the interested parties are working together, you have the best chance of reducing the threat,” said Knieff.

He noted that most banks already have a robust fraud management system in place to look at the spending activity on debit cards, credit cards and prepaid cards, to identify unusual patterns of behavior. “In most instances, they’re looking for things like, say, lost or stolen credit cards or debit cards that are being used at a jewelry store or in a different country, or something of that nature,” said Knieff. “Most people have gotten that phone call from their banks at some point in their lives. They have got a lot of the technology in place. Part of it is to have a different set of rules and fraud detection logic to address this kind of challenge, because it’s not the same style of fraud.”

Increasingly, before a new customer can get a bank account with a debit card associated with it, or get a prepaid card, financial institutions are looking to collect more identifying data about a client before approving them. “This is a requirement from an anti-money laundering perspective,” said Knieff. “What they’re starting to do is look for inconsistencies with that identity information that may indicate somebody is using the identity and the actual person doesn’t know about it.”

For example, banks are looking for discrepancies in the address or phone number that might indicate some unusual activity associated with the origination of a bank account or prepaid account. “They’re using multiple techniques to attempt to identify the potential for this sort of fraud, and leveraging some things that are already happening from an anti-money laundering perspective to enhance their ability to identify this sort of scheme,” said Knieff.

He noted that tax preparers are often not able to do much until a client’s tax return is filed and the IRS rejects it. “Most of these schemes are not identified until the legitimate client files and the IRS comes back and says, ‘Wait, no, you’ve already filed before,’” said Knieff. “That could be the first time that anybody can identify that the fraud occurred.”

He advises filing taxes as soon as possible to beat out identity thieves. “It’s kind of like whoever can get there first,” said Knieff. “If I file on January 30 and the criminal tries on February 10, the IRS is going to say, ‘Nope, that one has already been done. Sorry, bad guy.’ Just from a consumer perspective, the earlier one can file, the less likely one is to run into this kind of situation.”

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