As tax season rolls around, financial institutions need to be on the lookout for signs of tax identity theft. Tax identity theft is when a scam artist steals someone’s Social Security Number (SSN), files a fraudulent tax return usually with false information, and collects the refund.
This fraud can take a few different paths. Here are some tips your financial institution can use to protect itself.
1. Beware of Mule Accounts
Often, scam artists open new bank accounts just for the purpose of receiving tax refunds from fraudulently filed tax returns, and as a result, banks often see an increase in mule accounts opened during tax season. Often, these accounts are opened by foreigners or exchange students.
To protect your bank, always make sure that you perform adequate due diligence on all new customers, and once new accounts have been opened, keep an eye out for these red flags:
- New accounts opened by the same person at multiple financial institutions at the same time
- Multiple deposits from the US Treasury Department into the same account
- Tax refunds from revenue departments located in other states
- Transfers to overseas accounts made immediately after deposits are received
In some cases, the scam artist may be someone who already has an account at your bank, and in this situation, you should look for deposits that don’t match the customer’s regular deposit profile.
2. Watch for Account Takeover
Alternatively, some scam artists may take over someone’s account, file a return in their name, and wait for the refund to be deposited to that account. To spot account takeover, you need behavioral analysis tools that scan thousands of data points and look for the following issues:
- Multiple accounts changed to the same address
- Address changes made from a device that is not regularly used to sign in to the customer’s account
- Log-ins from multiple IP addresses in other countries or areas far from the customer’s home
- An unusual ratio of sign-ins from devices that are marked as unknown
- Sign-ins to multiple accounts from the same IP address
- Changes to accounts that happen quickly after preliminary anti-fraud actions have been taken — for instance, if you have recently sent out emails to customers warning them of the risk of fraud and a scam artist receives the email, they may change the email addresses on all the accounts they have taken over to minimize their risk of detection.
3. Educate Customers About the Risk
Although your financial institution may end up suffering losses related to tax identity theft, your customers are the ones being targeted, and their vigilance can play a critical role in protecting your bank.
Reach out to your customers about this risk and give them tips on how to protect themselves. Here are some ideas you may want to cover:
- Protect your Social Security Number (SSN) by shredding paper documents.
- Never enter private information on websites you don’t know and trust.
- Do not sign into bank accounts, access tax return software, or look at other sensitive information on shared WiFi networks at coffee shops, airports, or hotels.
- Consider filing your tax return as early as possible— if you file first, scam artists won’t be able to submit a fraudulent return in your name for that year.
- Be aware of unusual notices from the IRS such as notices related to tax years when you didn’t file a return, a tax transcript you didn’t request, a notice that an online account has been created in your name, or a rejection when you try to e-file.
4. Return Fraudulent Refunds to the IRS
The Internal Revenue Service (IRS) wants financial institutions to return any fraudulently claimed refunds that are deposited into their accounts.
Track the potentially fraudulent refunds you receive along with the associated taxpayer info, and then, send a spreadsheet of the information to the IRS. Always make sure that the information you send is encrypted. Once you submit your report, the Wage and Investment division of the IRS should respond and provide you with more instructions.
To protect your customers and your financial institution from all types of fraud including tax identity theft, you need machine-learning real-time fraud detection and prevention solutions. Safeguard your bank through tax season and beyond with our tools and services. Ready to learn more? Contact us at SQN Banking Systems today.