During tax season, financial institutions have to deal with a specific type of fraud — tax refund fraud. Criminals file fake returns to claim refunds and then, have the money deposited into their own or a mule account.
Tax refund fraud doesn’t directly create losses at your bank, but if the IRS reclaims the funds after someone receives the refund and spends the money, you may be stuck with the losses from the overdrawn account. To protect your bank during tax season and to reduce tax refund fraud in general, keep an eye out for these signs of tax refund fraud.
1. Mule accounts
Mule accounts are commonly used in tax refund fraud. Criminals may open accounts with fake details, have their fake refunds deposited, and quickly withdraw the cash. Or, they may convince existing bank customers to be mules on their behalf.
Make sure you have processes in place that look for signs of mule accounts on a transactional level and also when the accounts are being opened. Ideally, you should have these processes in place all year long. Criminals don’t just use mule accounts for tax refund fraud. They use them for a wide range of other types of fraud and money laundering practices.
2. Multiple tax refund deposits
Scam artists often use the same account to deposit multiple tax refunds. If your financial institution is receiving multiple Treasury deposits in different names directed to a single account, that is a sign of tax refund fraud.
In some cases, legitimate account holders may let their friends or family deposit their refunds into their accounts. This can be especially prevalent with lower-income clients who may have a lot of unbanked friends and associates. However, it should be very easy to contact the account holder and verify if the deposits are fraudulent or legitimate.
3. The only deposits are tax refunds
A legitimate account holder usually has deposits from multiple places. They may deposit paychecks, benefit checks, cash, or even transfers from payment processors such as Venmo. A fraudulent account created for tax refund fraud, in contrast, is likely to just have tax refund deposits and nothing else.
4. Inconsistent processing of third-party tax refunds
A lot of tax preparers process tax refunds for their clients. For example, a taxpayer can go into one of the big tax prep chains, file their return, and then get their refund instantly. To make this possible, the tax prep company must receive the client’s tax refund in their own account.
Tax prep companies also process taxpayer refunds through the company’s account when they allow the taxpayer to pay the tax prep fee through their refund. With this process, the tax preparer receives the refund, extracts their payment, and then sends the remainder to the client.
This practice isn’t just for the big companies. Many small accounting firms and tax prep companies often use this strategy. Professional tax prep software such as Intuit ProSeries facilitates this. Or the company may just use their personal resources.
As a result, you will see multiple tax refunds going into the same accounts in your financial institution. In these situations, you need to look for a volume of deposits that is inconsistent with the company’s regular practices. You also need to look for multiple refund deposits going into personal accounts, rather than business accounts.
5. Signs of fraudulent refunds
In addition to multiple deposits, the refund checks will also have a few telltale signs of fraud. Scam artists often use the same info on multiple tax returns — so you may see multiple refunds in about the about same amount going into the same account.
Because they send in their fake returns at the same time, the Treasury often generates the checks at about the same time. As a result, you may see refund checks with sequential or nearly sequential numbers.
6. The same address on multiple accounts.
A tax refund scammer may open multiple accounts with different names and tax identification numbers. But because the criminal needs the ATM or debit card associated with the account, they will supply the same address on each account.
Similarly, you may also notice the same IP address during the account set-up process. Or you may see multiple accounts using the same email or phone number.
7. Indicators of teller involvement
Tax refund fraud, like most other types of bank fraud, doesn’t always originate outside your financial institution. Sometimes, it starts inside. Bank employees are uniquely positioned to carry out fraud because they know about your anti-fraud practices.
If one of your tellers is processing more tax refunds than their co-workers, they may be involved in tax refund fraud. Another sign of collusion with a tax refund scam artist may be opening accounts that receive multiple tax refund deposits or opening new accounts without requiring the right identification.
Get Help Protecting Your Financial Institution From Fraud
Fighting fraud is a never-ending battle, and it’s constantly changing. Some types of fraud such as tax refund fraud are seasonal. Other types of fraud evolve and change as technology evolves and changes.
To protect your financial institution, you need solutions that can detect a wide range of fraud and that utilize artificial intelligence and machine learning to constantly improve their abilities. We can help you. To learn more, contact us at SQN Banking Systems today.