While taxpayers were popping returns into the mail this year, scammers were busy trying to figure out how to cash in. The Internal Revenue Service reported that, by Tax Day, they were investigating 1,800 active cases of identity theft investigations. Many of those cases involved millions of dollars each: just recently, a New York woman pleaded guilty for her part in a $65 million stolen identity tax refund fraud scheme.
The IRS has long walked a balance between trying to prevent fraud and issuing refunds to taxpayers in a timely manner. Taxpayers who file electronically and use direct deposit can get refunds in an average of 10 work days. That’s good news for taxpayers but even better news for fraudsters who hope to use the accelerated refund procedures to sneak in bogus claims. Putting the brakes on those refunds for fraudsters can, in some cases, slow down refunds for honest taxpayers. Finding ways to get refunds into the hands of honest taxpayers without increasing the opportunity for fraud has been difficult.
The IRS is introducing new procedures in 2015 which could help address some of these issues.
Effective for the 2015 tax season, the IRS will limit the number of refunds electronically deposited into a single financial account (such as a savings or checking account) or prepaid debit card to three. Under the new rules, any subsequent refunds will be issued by paper check and mailed to the taxpayer. The idea is to make it more difficult for criminals to obtain multiple refunds.
Of course, the new rules could make it more difficult for some honest taxpayers, too, such as families which use a single bank account. The IRS will not make an exception for accounts used by parents and children or other family configurations: those taxpayers will need to plan ahead by making other deposit arrangements or waiting a little longer for a paper check. Paper checks tend to take up to four weeks, compared to ten days by direct deposit. If you’re making other deposit arrangements, keep in mind that the IRS can only deposit tax refunds into accounts held by the taxpayer.
The rule also applies to preparers. I’ve long encouraged taxpayers to avoid using preparers who attempt to direct refunds into their own accounts. It’s not faster or better. Such preparers are often involved in schemes to steal taxpayer identities, money or both. Additionally, preparers are not allowed to get paid by splitting refunds using a federal form 8888 (downloads as a pdf) or by opening a joint bank account with the taxpayer. If a preparer suggests these options to you, walk away and do so quickly.
It’s worth noting that most taxpayers will not be affected by the new rules. The IRS continues to encourage the use of filing electronically in combination with direct deposit, claiming that it’s the “fastest, safest way for taxpayers to receive refunds.”
Assuming that tax season opens on time in 2015 (and that’s a big assumption with legal challenges such as this one pending), expect the new rules to take effect in mid-January 2015.
