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Administrators: Utah State Tax Commission Detects TurboTax Fraud

Posted on December 16, 2015 by Amy Hamilton
State Tax Notes recognizes the Utah State Tax Commission for its role in uncovering and bringing to national attention the stolen identity tax refund fraud perpetrated through Intuit's TurboTax software in 2015.

The commission detected the widespread fraud in the first days of the 2015 filing season and sounded the alarm, swiftly mobilizing action not only in Utah but in other states even as the IRS itself for months denied that the fraud extended to federal returns.

John ValentineAccording to commission Chair John Valentine, the agency just months earlier had laid out for state lawmakers the uptick in computer-assisted fraud that administrators were starting to see. In what Valentine describes as a joint effort, the commission and the Utah Legislature agreed that the agency needed additional funding for computer programming to implement a heavier front-end review of tax returns before refunds went out.

The commission brought in a vendor to do the computer programming and beta-tested its new system throughout the fall of 2014.

"It looked like it was running really well," Valentine said.

But when Utah started accepting returns on January 2, the same day the IRS uses for the start of the federal filing season, it seemed the new system had gone haywire.

"That first week, our processing division called me and said, 'Commissioner, you've got to come down here, we've got a problem with our program,'" Valentine said.

Dolores FurnissValentine and Executive Director Barry Conover met with Dolores Furniss, the head of the commission's fraud detection unit, and watched as the new electronic processing system kicked out huge numbers of suspicious returns.

"That first week we had about 3,800 returns that were highly suspicious," Valentine said, adding that such a number is atypical in Utah so early on in the filing season. "I made the decision to stop refunds until we could figure out what was going on."

Valentine talked to Gov. Gary Herbert (R), who gave the chair his vote of confidence and promised to back the commission in its decision to hold refunds until the agency could figure out what was going on.

In the meantime, the commission was taking the suspicious returns out of the electronic processing system and processing them by hand, contacting individuals named on the returns to verify identities and information on the return. "It's a very time-consuming process, and it's one that we don't like to do if we don't have to," Valentine said.

Taxpayers named on suspicious returns confirmed that they had not yet filed their returns and that the numbers on the returns were incorrect. The commission brought in TurboTax officials and together started feeding returns into the system that revenue officials had verified were either fraudulent or legitimate.

"The analytics were working exactly as they were designed," Valentine said. "We were getting a huge percentage increase in the number of fraudulent returns."

Barry ConoverValentine said the commission spent the next few days notifying other state tax commissioners and the IRS. "Within the first 24 hours of that notification, 11 states called me back and said, 'You're absolutely right; we're having the same problems.'"

The commission then went public.

On February 5 Utah became the first state to issue a news release describing the fraud; by then the commission had flagged 8,000 state returns as suspicious. Intuit that same day suspended transmission of returns through TurboTax, and on February 6 announced it was working with state tax agencies to address growing concerns over fraud.

The fraudsters attempted to steal refunds in at least 19 states. In testimony to the U.S. Senate Finance Committee, Valentine said that for more than a year the IRS had neglected to tell state officials about a known scam in which fraudsters were taking data from a taxpayer's last state tax return and copying it into the current year's return.

IRS Commissioner John Koskinen in March called the first security summit bringing together state, federal, and private-sector leaders, who have since created and formalized new data sharing arrangements for the 2016 filing season to help prevent stolen identity refund fraud. The FBI, IRS, and Justice Department continue to investigate the fraud.

Utah, meanwhile, continues to be ahead of the curve. On March 12, the same day Valentine testified in Washington, the Utah Legislature approved a measure (SB 250) moving up deadlines for employers to file withholding information. Introduced by state Sen. Curtis Bramble (R), president of the National Conference of State Legislatures, the new law authorizes the agency to delay issuing a refund until March 1 unless both the employer and employee have filed all required returns and forms so that the agency can match the data.