The Financial Crimes Enforcement Network, one of the Treasury Department’s lead agencies in the battle against money laundering and other crimes, has issued an advisory to financial institutions warning them to beware of tax refund fraud and identity theft, and to report such activity by filing Suspicious Activity Reports.
FinCEN noted in the advisory it issued Tuesday that Identity theft can be a precursor to tax refund fraud because individual income tax returns filed in the United States are tracked and processed by Taxpayer Identification Numbers and the individual taxpayer names associated with these numbers.
Criminals can obtain these ID numbers through various kinds of identity theft, including phishing schemes and the establishment of fraudulent tax preparation businesses.
In response to this problem, the Internal Revenue Service has developed a strategy of preventing, detecting, and resolving instances of tax-related identity theft crimes. FinCEN worked closely with the IRS to identify the following indicators of tax refund fraud.
Financial institutions are critical in identifying tax refund fraud, FinCEN noted, because the methods for tax refund distribution—issuance of paper checks, and direct deposit into demand deposit or prepaid access card accounts—often involve various financial services providers. The number of tax refunds being distributed via direct deposit has increased significantly over the past several years and continues to increase annually, FinCEN pointed out.
In direct correlation, financial institutions may see tax refund fraud activity increase and related suspicious activity may be connected to direct deposit transactions. To help financial institutions identify potential tax fraud, FinCEN, in consultation with the IRS and law enforcement, has identified the following red flags:
• Multiple direct deposit tax refund payments, directed to different individuals, from the Treasury Department 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. This activity often occurs with fraudulent returns for the elderly, minors, prisoners, the disabled, or recently deceased.
• 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 credits 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.
• Business accountholders processing third-party tax refund checks in a manner inconsistent with their stated business model or at a volume inconsistent with expected activity. Similarly, individuals processing third-party tax refund checks through a personal account with no business or apparent lawful purpose.
• Business accountholders processing third-party tax refund checks and conducting transactions inconsistent with normal business practices, which may include:
o A large volume of Treasury refund checks or bank checks being deposited, in contrast to other checks, such as payroll checks;
o A large volume of refund checks bearing addresses of customers who reside in another state;
o Multiple refund checks for the same or almost the same dollar amount;
o Treasury refund checks or bank checks representing electronic refunds with sequential or close to sequential numbers;
o The dollar amount of checks being deposited is not commensurate with the amount of currency being withdrawn to cover the cashing of these refund checks.
• Multiple prepaid cards that are associated with 1) the same physical address [individuals involved in criminal activity may also contact the customer service department requesting to change their address for their permanent prepaid card shortly after opening their temporary prepaid card account on-line]; 2) the same telephone number; 3) the same e-mail address; or 4) the same Internet Protocol, or IP, address, which receive tax refunds as the primary or sole source of funds.
• The opening of a business account for a check cashing business at a financial institution, which subsequently processed a high volume of tax refund checks issued to individuals from other states.
• A sudden increase in volume involving the cashing of tax refund checks issued to individuals from across the United States, moving through the account of an existing check cashing service.
• Individuals using bank accounts where the majority of the transactions are ACH federal tax refunds or refund anticipation loans.
• Individuals attempting to negotiate double endorsed Treasury tax refund checks with questionable identification.
• Individuals accompanying multiple parties to the bank to negotiate Treasury tax refund checks. Such items may or may not be double endorsed checks.
• The freezing or closure of a personal or business account due to suspicious activity involving either Treasury tax refund checks or ACH Treasury deposits.
• The signature/endorsement on the back of the check(s) does not match the identification of the individual conducting the transaction.
• The same signature/endorsement is used on multiple checks, with multiple names.
• Employees of financial institutions may also facilitate tax refund fraud by conducting transactions inconsistent with normal activity through the following practices:
o Tellers who regularly process large quantities of Treasury tax refund checks. This may include one or more tellers during a specific time frame.
o Bank employees who open multiple bank accounts that received a large quantity of Treasury tax refund checks.
o Bank employees who did not follow proper identification procedures or accepted apparent fraudulent identification when opening an account.
Suspicious Activity Reporting
If a financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity or an attempt to disguise funds derived from illegal activity, is designed to evade regulations promulgated under the Bank Secrecy Act, or lacks a business or apparent lawful purpose, the financial institution may be required to file a suspicious activity report. When completing SARs on suspected tax refund fraud, financial institutions should use the term "tax refund fraud" in the narrative section of the SAR and provide a detailed description of the activity.
Due to the time-sensitive nature of these transactions, a financial institution may also wish to contact their local IRS Criminal Investigation Field Office to alert them that a SAR has been filed related to tax refund fraud. In order to obtain contact information for a local IRS Criminal Investigation Field Office, financial institutions can call the FinCEN Regulatory Helpline at (800) 949-2732.
FTC Complaints of Identity Theft
Separately, the Federal Trade Commission reported Tuesday that identity theft is once more the top complaint received by the FTC, which has released its 2012 annual report of complaints.
2012 marks the first year in which the FTC received more than 2 million complaints overall, and 369,132, or 18 percent, were related to identity theft. Of those, more than 43 percent related to tax- or wage-related fraud.