States face an elevated risk of tax fraud due to data breaches, report says
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Tech and data aren’t the only tools governments have to detect and mitigate fraud, one expert said.
As tax agencies gear up to issue refunds to residents, governments continue to face elevated risks of tax fraud, a new report suggests.
Last year, there were 970 data breaches across the U.S. that exposed the personally identifiable information of millions of Americans, which opened the door for fraudsters to leverage that data to take advantage of tax return refund programs and other social safety net systems, according to a new report from TransUnion.
“As PII enters the criminal marketplace, fraudsters procure it and they’re going to need to monetize it somehow, so they’re going to turn toward … the tax season as a way to generate a return on investment they made acquiring this data,” said Greg Schlichter, director of research and consulting for TransUnion.
While fraud has generally declined since the COVID-19 pandemic, the global health crisis has “emboldened” fraudsters to target the government more and more, he said.
With a person’s sensitive information like their Social Security number, previous financial statements or birth date, a fraudster is “better equipped to impersonate their victims,” said Schlichter.
State tax authorities should be vigilant of bad actors impersonating victims particularly over the phone when they contact call centers for tax-related operations, he said. Amid states’ IT modernization and digital transformation endeavors, “one thing that goes underlooked is the phone,” he said.
“There’s a stronger need to incorporate risk signals and smarter risk decisioning when it comes to the call center,” Schlichter said. In addition to tracking routine call data, such as how long people are kept on hold or how many calls are answered in a day, agencies should also prioritize collecting data on how many calls come from a foreign number or VoIP service.
Agencies can also increase surveillance on devices, such as device intelligence signals, that have already been reported to have been used in previous scams and are being used again, Schlichter said. If somebody is trying to log into or sign up for an account with a government portal using the same device, for instance, authorities flag the transaction and review it.
Fraud doesn’t always require a technological solution, he said, pointing to the value of having agency personnel equipped to recognize potentially fraudulent activity, such as someone changing their address repeatedly.
Tax authorities also face the increasing threat of bad actors who impersonate official government agencies to scam people, Schlichter said. As technology advances, scammers’ methods have too, and they increasingly leverage chatbots or social media channels to interact with unsuspecting victims, experts said during a session at the National Conference of State Legislature’s Base Camp 2024.
In 2023, American consumers lost $76 million in payments to government impersonators, a 90% increase from $40 million the year before, according to data from the Federal Trade Commission.
Government agencies must be able to “cut through the noise” of scammers and establish themselves as legitimate sources of tax-related information to further prevent and mitigate fraudulent payments to the wrong recipient, Schlichter said.
Authorities should invest in tech measures that verify a call is coming from a government source, for instance, which can help residents build trust in their government’s communication channels.
Officials should also consider how they alert residents of and manage fraudulent activity, Schlichter said. Agencies should have clear guidelines for residents to follow for reporting fraud and ensure that their sites, chatbots and call centers are equipped to handle increased traffic throughout the tax season.
“At a time when a lot of indicators … of public trust in government are reading low,” Schlichter said, implementing more stringent and proactive fraud detection measures can “help agencies begin to rebuild some of the trust.”
