Indiana combats tax refund fraud with ID verification

Editor's note: This article has been changed to correctly reflect LexisNexis's current ID management customers.

Indiana’s Department of Revenue plans to combat tax refund fraud with a new identity management system to debut this month.

The state’s focus on identity management comes amid a rise in taxpayer identity theft. According to the Internal Revenue Service, identify theft hit 1.2 million taxpayers in 2012. And in just the first half of calendar 2013, 1.6 million taxpayers were affected, the IRS noted.

Indiana awarded a contract to LexisNexis Risk Solutions to verify and authenticate taxpayers’ identities when they file for income tax refunds. Chetrice Mosley, a spokeswoman for the Department of Revenue, said the security measure will launch in time for the 2014 tax season, which begins January 31.

Mosley said the revenue department believes identity thieves now recognize that people are “more at risk of providing information in unsecure ways” during the tax season.

“This is ... the big crime right now,” said Andy Bucholz, LexisNexis vice president of government solutions, referring to government payment- and benefits-related identity theft.

Bucholz said the problem stems from government agencies stepping up the number of initiatives in which citizens apply for benefits online and receive payments electronically or as a debit card. As those programs have grown over the past three years, so too has fraud. The anonymous nature of electronic benefits gives identity thieves an edge, Bucholz suggested. Previously, an applicant would need to visit a government office and produce ID such as a driver’s license or passport.

“When you go online, you are missing that connection,” Bucholz said.

“Government agencies ... have inadvertently opened this back door to fraud.”

Time and Money

Identify theft has a number of ramifications. The crime hits government coffers: when a thief makes off with a citizen’s tax refund, the state still needs to pay the legitimate recipient as well. Time is also an issue. Citizens who have had their identities stolen typically face a lengthy process of affirming their identities with government entities.

The Treasury Inspector General for Tax Administration (TIGTA) last fall reported that it takes the IRS an average of 312 days to resolve tax-related identity theft cases. TIGTA reviewed a sample of 100 identity theft cases and found that the IRS correctly identified the proper owner of a Social Security number in every case. But case processing proved time consuming.

Taxpayers, according to TIGTA, “faced delays, with some cases having significant inactivity during case processing.”

“The amount of time and effort involved is enormous,” Bucholz said, referring to the task of proving an identity.

How it works

Against this backdrop, Indiana’s identity management solution aims to root out fraud without disrupting the flow of tax refunds. Here’s how it works:

Certain portions of each tax return seeking a refund will travel over a secure exchange to LexisNexis. At LexisNexis, identity-based filters will screen tax refund requests against what the company described as billions of identity records culled from public databases and commercial sources.

The Department of Revenue processes some 3.2 million tax returns annually.

Mosley emphasized that only pieces of information from a taxpayer’s return are sent to LexisNexis to verify across its database.

“We are not sending LexisNexis tax returns,” she said, noting that the state has strict confidentiality laws.

Mosley said the department anticipates that 90 percent of the returns seeking refunds will go through the LexisNexis system with no problem. The other 10 percent of the filers will be asked to take an online quiz to further verify their identities.

The department will send letters to taxpayers, directing them to an online application where they can take the quiz. Bucholz said the quiz will be populated with questions based on a filer’s public records, making it hard for an identity thief to answer them.

Mosley said the department doesn’t expect taxpayers to experience a slow down in refunds, which generally take 10 to 14 days to arrive if the taxpayer files electronically.

Broader Market

Indiana isn’t the first state tax department to hire LexisNexis for its identity management offerings. Bucholz said Georgia, Louisiana and Connecticut use the solution or are in the process of installing it. LexisNexis launched a pilot with Georgia in January 2012 and announced in May of that year that the state awarded it a contract to continue its work.

That pilot program detected that 2 percent of returns were potentially fraudulent. 

The LexisNexis contract is one component of Indiana’s broader identity protection program, which also includes an education initiative that aims to help taxpayers protect their identities. Mosley said the Department of Revenue is working with the Office of the Indiana Attorney General to “further educate taxpayers to protect themselves against identity theft.”