Vermont Department of Taxes Withholds Refunds in Response to Rise in Tax Fraud

By Malkie Wall

The Vermont Department of Taxes has resumed issuing tax refund checks, after halting the process for almost a week because of fears of refund fraud in other states.

Refund fraud occurs when thieves use stolen identities, including Social Security numbers, to file phony tax claims. It may result in fines and imprisonment.

In 2014 alone, the Vermont Department of Taxes uncovered more than 800 fraudulent returns.  This discovery prevented over $1.5 million in losses to the state. The Department has responded by expanding its fraud detection efforts for 2015.

“Our focus is to lessen the impact of identity theft on Vermonters,” said Mary Peterson, the state tax commissioner, in a news release.

“We are working to ensure Vermont tax dollars go to the rightful recipients and stay out of the hands of criminals. In addition to increasing the number of safeguards to our systems, we are in regular contact with software vendors, revenue departments in other states and the IRS to share information, such as new ways criminals have developed to commit fraud,” Peterson said.

Tax refund fraud is a growing problem in Vermont and nationwide. Multiple other states around the country, including Minnesota, Utah, and Georgia, have reported increases in the number of fraudulent requests. Some states are taking preventative steps.

Additionally, TurboTax temporarily stopped electronic filing for state returns after several fraud attempts were spotted.

Some have attributed the recent spike in tax refund fraud nationwide to large-scale data breaches outside the tax world, which have made consumer information readily available to online criminals.

In a news release on Thursday, the Department stressed that the “increase in refund fraud is not related to any security breach of Vermont government systems but rather the use of identities stolen elsewhere.”

Often identity thieves utilize special software that allows them to use the same identity to produce tax returns in several states. Fraudulent filers typically request direct deposit of refunds to debit cards.

One approach the Department is taking is to issue paper checks for certain refund claims. Since claims filed by fraudulent identities are often linked to first time returns, the Tax Department is also issuing paper checks to all first time filers.

Some Vermonters may notice that their refunds are slower to arrive this year. While a lot of the screening is done electronically, reviews are conducted manually.

Although the department has increased the number of staff working on fraud detection, the department acknowledges that additional screening will likely delay refunds throughout the tax season.

Taxpayers who have not filed their taxes but receive a refund by paper check should report it to the Department as soon as possible, as it suggests that someone has made a fraudulent tax claim in your name.

The best way to protect against tax fraud is to file a legitimate return. Fraudulent filers will try to file a return in your name before you do, so the department advises taxpayers to file as early as possible to beat potential fraudulent claims. Peterson also encourages e-filing, which is quicker and more accurate than filing for a paper return.

Peterson said that it is important for people to be vigilant and to educate themselves about the many scams criminals use to steal personal information. For anyone worried that they may be a victim of identity theft, the department had this advice: Identity theft is a common problem, often committed through the sharing of personal and banking information over the Internet.