States Use Big Data to Nab Tax Fraudsters

Tod Newcombe at Governing: “It’s tax season again. For most of us, that means undergoing the laborious and thankless task of assembling financial records and calculating taxes for state and federal returns. But for a small group of us, tax season is profit season. It’s the time of year when fraudsters busy themselves with stealing identities and electronically submitting fraudulent tax returns for refunds.
Nobody knows for sure just how much tax return fraud is committed, but the amount is rising fast. According to the U.S. Treasury, the number of identified fraudulent federal returns has increased by 40 percent from 2011 to 2012, an increase of more than $4 billion. Ten years ago, New York state stopped refunds on 50,000 fraudulently filed tax returns. Last year, the number of stopped refunds was 250,000, according to Nonie Manion, executive deputy commissioner for the state’s Department of Taxation and Finance….
To combat the problem, state revenue and tax agencies are using software programs to sift through mounds of data and detect patterns that would indicate when a return is not valid. Just about every state with a tax fraud detection program already compares tax return data with information from other state agencies and private firms to spot incorrect mailing addresses and stolen identities. Because so many returns are filed electronically, fraud spotting systems look for suspicious Internet protocol (IP) addresses. For example, tax auditors in New York noticed that similar IP addresses in Fort Lauderdale, Fla., were submitting a series of returns for refunds. When the state couldn’t match the returns with any employer data, they were flagged for further scrutiny and  ultimately found to be fraudulent.
High-tech analytics is one way states keep up with the war on fraud. The other is accurate data. The third component is well trained staff. But it takes time and money to put together the technology and the expertise to combat the growing sophistication of fraudsters….(More)”