Your friends at the Internal Revenue Service are eager to get everyone to do their federal taxes online. But in their efforts to make everything quick and easy, they’ve wound up helping Internet tax scammers, too. And it’s not a phishing scheme or involves hacking, but is based on filing false online returns and collecting the refund. So this tax season, the government is warning people of the dangers.

Identity thieves are very busy – last year, the IRS identified nearly a million fraudulent returns to the tune of $6.5 billion. Over half of these were related to identify theft, which is three times the amount of just three years before. And those are just the ones caught before any refunds had been issued. The IRS can’t, or won’t, even estimate how much money they’ve actually sent to scammers.

Tax fraud has become an epidemic especially in areas like South Florida, with some gangs replacing drug sales and robberies with online crimes committed with iPads. Gangs even hold work parties to teach each other and commit hundreds of crimes in a single session. So many local officials are complaining about the lack of governmental concern and effective action.

Working the fraud, authorities claim, is quite simple, and there are even written tutorials for thieves. The criminals first acquire victims’ Social Security numbers and other personal information. Perhaps they buy the data from insiders with access to medical or financial records or even online, or physically trawl through dumpsters. Then they file an online tax form with a fake income over free Wi-fi and wait. Sometimes they will actually get Treasury checks sent to specially set up mail drops, or more and more frequently, the thieves will purchase debit cards to get the cash electronically.

The criminals usually don’t have to wait too long. Within a week or two, the IRS processes the online form – without first checking the information, including W-2 forms – and issues the refund. Officials say that if the IRS would slow the process down and eliminate debit cards, the system would much less amenable to this sort of fraud, but there is little sign of that happening, at least this tax season. The government vigorously defends the use of third-party debit cards as a means of getting refunds to those without bank accounts.

The IRS does have a few safety tips for us non-criminals:

  • Do not respond to emails claiming to be from the IRS asking for personal information.
  • Contact the IRS promptly if your identity may have been stolen.
  • If you are filing online tax returns, use a strong password. (See this issue of our newsletter, The Portal, for detailed information on how to generate a good password.)
  • Save your electronically filed tax return to a CD or flash drive, and store it in a safe place.
  • After saving the e-file, delete personal return information from your hard drive.

And of course, if you’re filing online via Wi-fi, be aware of your environment and who may be reading over your shoulder. Make sure you use a legitimate network, and use encryption.

Though the IRS claims to have trained 40,000 employees over the last several months, many frustrated law enforcement officials decry the situation as needing much more effort. The IRS also claims that special electronic filters and markers are in place to catch fraud and mark accounts that have been defrauded before. And since last year, they’ve issued “Identity Protection Personal Identification Numbers” to victims to make filing future tax returns easier.

But it takes up to a year to get a legitimate return if there has been a fraud committed. Worse, the use of identification numbers and filters block all the honest returns from the real taxpayers along with the bogus claims from criminals under the same names – there is no quick and easy way to tell them apart. They have to be examined and compared, one by one.

So, as with viruses, phishing, and other evils, online tax fraud is best to avoid if at all possible. To help, the IRS has more detailed advice here.

Good luck!