Compliance: CUs essential in fight against tax refund fraud

January 25, 2016

WASHINGTON (1/25/16)--Identity theft tax refund fraud is the No. 1 Internal Revenue Service (IRS) scam, but it’s a scam that credit unions can help thwart. Since the methods of tax refund distribution are usually run through a financial institution, credit unions are in a good position to identify a scam as it's happening.

As part of the scam, an identity thief uses a taxpayer’s identity to file a fraudulent tax return and claim a refund.

As tax season continues, credit unions should review the following tax refund fraud red flags, provided by the IRS and the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN):

  • Multiple direct deposit refund payments going into one member’s account;
  • Individuals attempting to negotiate double-endorsed tax refund checks with questionable identification;
  • One individual accompanying multiple parties to the credit union to negotiate tax refund checks;
  • The same signature/endorsement used on multiple checks, with multiple names;
  • An account opened on behalf of individuals who are not present, with the opener being named as having signatory authority and the subsequent activity limited to direct deposits of tax refunds. This activity often occurs when exploiting returns for the elderly, minors, prisoners, the disabled or recently deceased;
  • A single individual opening multiple prepaid card accounts in different names, using valid taxpayer identification numbers (TINs) for each of the supplied names and having cards mailed to the same address;
  • A personal account where the majority of the transactions are automated clearing house tax refunds (even if this is not tax fraud, the member may be using a personal account as a business account);
  • A business account processing third-party tax refunds in a manner inconsistent with its stated business model; and
  • For money-services business accounts--a sudden increase in volume involving tax refund checks issued to individuals from across the country.

If the credit union determines that a suspicious activity report (SAR) should be filed, FinCEN requests that the term “tax refund fraud” be included in the narrative section.

Also, due to the time sensitive nature of these transactions, FinCEN recommends that credit unions alert local IRS Criminal Investigation Field Offices.

This week also marks the start of the Federal Trade Commission’s tax identify theft awareness week, with webinars and Twitter chats scheduled throughout the week.

The Credit Union National Association's CompBlog takes a deeper look at this issue in a recent post. CUNA's Compliance Community features the latest CompBlog posts, as well as other items on credit union compliance topics.