States attempt to combat tax fraud using paper checks for some refunds

Lately, much has been made of the increasingly creative and pervasive tax fraud schemes. To combat them, state and federal governments have deployed a plethora of tactics, as we explained last month. Now, some states are going one step further by reverting to a particularly old-school method: using paper checks for issuing refunds.

South Carolina

Last week, the South Carolina Department of Revenue (SCDOR) announced its implementation of “enhanced [security] measures, including the conversion of some direct deposit refunds to paper checks,” beginning in early March.

Despite requesting a direct deposit for a refund, some will receive paper checks, which may be slightly delayed. For these taxpayers, the SCDOR determined that the refund was “part of a targeted group flagged as containing potentially fraudulent refunds.” Even so, the receipt of a paper check does not mean that the taxpayer’s personal information has been compromised; it is a precautionary measure.

However, the SCDOR warns, if one receives a paper check as a refund but has not yet filed a return, one should not cash the check; and call the SCDOR as soon as possible.

The SCDOR concedes that criminals’ attempts to steal taxpayer refunds are a growing problem, but emphasized that it is committed to fighting it. The announcement provided reassurances that its systems have not been compromised, and that protecting taxpayer information remains its top priority.

Colorado

The Centennial State is undertaking the same precautions. While closely monitoring income tax filings, the Colorado Department of Revenue (CDOR) may issue refunds via paper checks instead of directly depositing them. Such action is “intended to prevent criminals from easily diverting fraudulent refunds to their own prepaid, reloadable cards or debit cards.”

The CDOR directs taxpayers to its website to verify the status of their returns.

Connecticut, Alabama, and Utah

Bloomberg.com reported that Connecticut, Utah, and Alabama will also be issuing refunds in the form of paper checks.

In Connecticut, all first-time filers and all refunds flagged as potentially suspicious will get paper checks.

In Utah, Bloomberg noted that the increase in paper checks is dramatic, because requests for refunds on certain types of debit cards are all being issued via checks.

And like some other states, the Alabama Department of Revenue is implementing an identity theft quiz to help detect suspected fraud. It is also converting refunds claimed by all first-time filers to paper checks instead of direct-depositing the refunds.

A nationwide problem

Bloomberg quoted Verenda Smith, deputy director at the Federation of Tax Administrators, as acknowledging that these states are the tip of the iceberg. She concedes that receiving paper checks is a minor inconvenience to taxpayers, but is also very helpful in stopping fraud.

A WLTX report revealed that there has been a 3,700 percent increase in fraudulent tax filings this year in some states. Nationally, the Internal Revenue Service identified 85,385 fraudulent federal tax returns involving identity theft in 2013. In 2014, that number fell to 28,076.

The report described the typical tax fraud case, in which thieves steal personal information and then use that information for nefarious purposes—they file bogus returns requesting that the refunds be sent to the thieves at a mail drop or an online banking account through direct deposit.