News and Tribune

Clark County

February 2, 2014

State launches tax season with fraud crackdown

10 percent of returns are expected to be flagged

INDIANAPOLIS — Some taxpayers may be asked to provide something extra this year with their state tax returns: Proof of identity.

Tax-filing season started Friday, and the state Department of Revenue is piloting an automated verification system designed to intercept identity thieves who’ve stolen tens of millions of dollars in tax refunds by duping revenue collectors.

“These are criminals who know what they’re doing and who are making a lot of money at it,” said state Department of Revenue Commissioner Mike Alley.

The criminals run the gamut from a relative who uses a family member’s information to file a tax return and intercept the refund, to a national network of thieves who steal identity information from multiple sources to divert tax refunds into their own bank accounts.

Last year, investigators identified more than 1,500 cases of Indiana taxpayers whose refunds were stolen by people pretending to be those tax filers. Many cases were detected only after taxpayers contacted the Department of Revenue to ask why they hadn’t received their refunds.

Alley said investigators probably caught less than half of the crime that occurred.

In cases where fraud was detected, the state still gave refunds to taxpayers who were affected. That meant the state ate the costs of the crimes.

“We don’t know the exact extent of the problem, but we know it’s costing us millions, actually tens of millions of dollars, every year,” Alley said.

This year the department will use an identification verification system developed by LexisNexis, a global research company. The system has been used by a handful of other states.

Alley said the system is designed to root out fraud without disrupting too much Indiana’s promised turnaround time of 14 days for a tax refund.

Portions of each return seeking a refund will be fed through software that screens selected information against billions of publicly available identity records culled by LexisNexis.

About 90 percent of those returns are expected to come back without a problem. For the 10 percent that don’t, the state will send filers a letter instructing them to take an online quiz to further verify their identities.

The quiz will include questions based on a filer’s public records, making it harder for an identity thief to answer them. For filers without Internet access, the department will offer assistance by phone or at its regional offices.

“It won’t impact most people,” Alley said. “For those who are impacted, we’re hoping they’ll understand our goal is to protect taxpayers and the state.”

Indiana isn’t alone in combating identify theft tax fraud.

Last year, the Internal Revenue Service issued $4 billion in fraudulent refunds to people using stolen identities, according to a U.S. Treasury Department report. The IRS has stepped up efforts to fight identity theft. In 2012, it intercepted more than $12 billion in fraudulent refunds, compared with $8 billion the year before.

In Indiana, efforts to stop tax fraud by identity thieves are part of a larger effort to remedy security problems identified by a 2012 audit that found the Department of Revenue was sacrificing accuracy for speed. The audit came after the department found it had lost track of about $500 million in tax revenues owed to local governments and state agencies.

Alley, the former CEO of Fifth Third Bank, was brought in to turn around the department. He’s since implemented an array of reforms and expanded the department’s information technology and security teams.

— Maureen Hayden covers the Statehouse for the CNHI newspapers in Indiana. She can be reached at maureen.hayden@indianamediagroup.com. Follow her on Twitter @Maureen.Hayden

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