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How analytics can prevent ID-theft tax fraud

May 18, 2015 (Photo Credit: Courtesy)

John A. Cassara is a former intelligence officer and Treasury Special Agent. He has written a number of articles and books about money laundering and financial crimes. He is an industry consultant for SAS Federal.

Now that the official tax season has come and gone, it's time for the federal government to examine what worked and how to improve the tax refund process. In today's world where Stolen Identity Refund Fraud (SIRF) is rampant, that means understanding the implications of tax refund fraud for this season.

Here's the truth: the Internal Revenue Service and its partners at the federal level — including the Department of Justice, Secret Service, the Postal Inspection Service, the Federal Bureau of Investigation and other federal law enforcement agencies — are fighting a losing battle. According to the IRS, the amount of tax refund fraud alone will soon reach $21 billion. Much of the fraud involves the almost exponential growth of identity theft.

Last year even Attorney General Eric Holder admitted to having his identity stolen. According to Holder, "These scams are no longer just about white-collar criminals. They are carried out by a variety of actors from greedy tax return prepares to identity brokers who profit from the sale of personal information to gangs and drug rings looking for easy access to cash." Sadly, there are many other examples of identity theft and tax refund scams, including robbing nursing home patients of their identities, fraudulent tax preparation services and international criminal organizations buying and selling stolen personal identifiers in bulk off the "dark web."

So what is being done to stop it?

IRS Criminal Investigations is the lead federal agency that investigates identity theft and is involved in more than 78 multi-regional task forces or working groups to combat the problem at the federal, state, and local levels. In fiscal year 2014, the IRS initiated 1,063 identity theft related criminal investigations. I commend the work that these men and women are doing every day — it's challenging. Unfortunately, enforcement is not the solution. Prevention is the answer.

SIRF is proliferating so quickly because it is so easy. In order to file a false tax return, all it takes is a name, date of birth and social security number. For example, the IRS accepts tax filings as soon as January 1. Using the above basic ingredients for a scam, a fraudulent return is filed early in the year. Employers aren't required to submit employment information to the IRS until March. By that time, approximately half of all refunds have been paid out. And, the IRS doesn't even begin to compare matching employer-submitted data to tax returns until the summer. The system invites abuse.

Another reason why enforcement is not going to solve the problem is because of the high number of cases and corresponding lack of resources. To put things in perspective, according to the IRS, from 2008 through May of 2012, the Service identified more than 550,000 taxpayers who have had their identities stolen for the purpose of claiming false refunds in their names. That number is on the low side because it represents only what the IRS has "identified." Moreover, by the IRS' own estimation SIRF has grown exponentially over the last three years. Divide the above number of actual IRS investigations in 2014 into the total number of identified individuals that are the victims of these crimes.

Another way of looking at it is that IRS Criminal Investigation division has approximately 2,500 investigators. They're stretched thin. Subtract those that are assigned to other types of cases, supervisors, those detailed to headquarters, etc. Divide that number into the skyrocketing number of SIRF cases.

The bottom line is that a SIRF criminal probably has a single digit chance of being identified, investigated, prosecuted and convicted! Individual criminals and global criminal organizations know that SIRF is more lucrative than narcotics trafficking and is accomplished at far less risk!

As a former Treasury Special Agent with experience in financial crimes enforcement, I know first-hand that we do not have enough manpower and resources to solve this problem by reacting with after-the-fact enforcement. Rather, we need to prevent these crimes from occurring in the first place. The solution is data and analytics.

The IRS certainly has the data. But, we need to augment the data with cutting edge technologies that search, mine, analyze, link, and detect anomalies, suspicious behaviors and related or interconnected activities and people. Fraud frameworks can be deployed to detect suspicious data, activity and anomalies using scoring engines that can both rate, with high degrees of statistical accuracy, behaviors that warrant possible further inquiry. In other words, advanced analytics can near instantaneously score submissions for tax refunds.

Furthermore, predictive analytics can use elements involved in a successful SIRF cases and overly these elements on other data sets to detect previously unknown behaviors or activities, enhancing and expanding an investigator's knowledge and productivity. IRS Criminal Investigations can use this information to more effectively deploy resources. And, as an investigative tool, visual analytics can be used as a high-performance, in-memory solution for exploring massive amounts of data very quickly. It enables users to spot patterns, identify opportunities for further analysis and convey visual results via Web reports or even the iPad.

Congress should stop being pennywise and pound foolish and give the IRS the analytic resources needed to stop SIRF in its tracks. Concurrently, genuine taxpayers should be told that they might have to wait just a little longer for their tax returns so as to ensure filers' true identities and prevent tens of billions of dollars of fraud.

These common sense solutions should make everybody's tax day a little less maddening.

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