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Advisory

FIN-2013-A001
Issued: February 26, 2013
Subject:   Update on Tax Refund Fraud and Related Identity Theft

The Financial Crimes Enforcement Network (FinCEN) is issuing this Advisory to remind financial institutions of previously-published information concerning tax refund fraud and the subsequent reporting of such activity through the filing of Suspicious Activity Reports (SARs). 1

Identity theft can be a precursor to tax refund fraud because individual income tax returns filed in the United States are tracked and processed by Taxpayer Identification Numbers (TIN) and the individual taxpayer names associated with these numbers. Criminals can obtain TINs through various methods of identity theft, including phishing schemes and the establishment of fraudulent tax preparation businesses.2 In response to this problem, the Internal Revenue Service (IRS) has developed a comprehensive strategy focused on preventing, detecting, and resolving instances of tax-related identity theft crimes.3 FinCEN worked closely with the IRS to identify the following indicators of tax refund fraud.

Identifying Tax Refund Fraud

Financial institutions are critical in identifying tax refund fraud because the methods for tax refund distribution - issuance of paper checks, and direct deposit into demand deposit or prepaid access card accounts - often involve various financial services providers.4 The number of tax refunds being distributed via direct deposit has increased significantly over the past several years and continues to increase annually.5 In direct correlation, financial institutions may see tax refund fraud activity increase and related suspicious activity may be connected to direct deposit transactions. To assist financial institutions with identifying potential tax fraud, FinCEN, in consultation with the IRS and law enforcement, has identified the following red flags.6

Suspicious Activity Reporting

If a financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity or an attempt to disguise funds derived from illegal activity, is designed to evade regulations promulgated under the Bank Secrecy Act (BSA), or lacks a business or apparent lawful purpose, the financial institution may be required to file a SAR.7 When completing SARs on suspected tax refund fraud, financial institutions should use the term "tax refund fraud" in the narrative section of the SAR and provide a detailed description of the activity. Due to the time sensitive nature of these transactions, a financial institution may also wish to contact their local IRS Criminal Investigation Field Office to alert them that a SAR has been filed related to tax refund fraud. In order to obtain contact information for your local IRS Criminal Investigation Field Office, financial institutions can call the FinCEN Regulatory Helpline.

Additional questions or comments regarding the contents of this Advisory should be addressed to the FinCEN Regulatory Helpline at 800-949-2732. Financial institutions wanting to report suspicious transactions that may relate to terrorist activity should call the Financial Institutions Toll-Free Hotline at (866) 556-3974 (7 days a week, 24 hours a day). The purpose of the hotline is to expedite the delivery of this information to law enforcement. Financial institutions should immediately report any imminent threat to local-area law enforcement officials.


1  Financial Crimes Enforcement Network, "Tax Refund Fraud and Related Identity Theft," (March 30, 2012), available at http://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-A005.html
2  For more information on identity theft, see e.g. "Identity Theft: Trends, Patterns, and Typologies Reported in Suspicious Activity Reports," (October 2010) at http://www.fincen.gov/news_room/rp/reports/pdf/ID%20Theft.pdf and http://www.fincen.gov/news_room/rp/files/ID%20Theft%2011_508%20FINAL.pdf; http://www.irs.gov/privacy/article/0,,id=186436,00.html?portlet=111; and http://www.ftc.gov/bcp/edu/microsites/idtheft/.
3  Prepared Statement, Douglas H. Shulman, Commissioner, Internal Revenue Service, before the United States House of Representatives Committee on Oversight and Government Reform, Subcommittee on Government Organization, Efficiency and Financial Management, p. 2 (June 2, 2011).
4  For more information on identifying direct deposit transactions representing Federal tax refund payments, see United States Department of the Treasury Financial Management Service, "The Green Book: A Guide to Federal Government ACH Payments and Collections," pp. 2-6 through 2-8 (August 2007, revised December 2011), available at http://www.fms.treas.gov/greenbook/pdf/GreenbookComplete.pdf.
5  See Internal Revenue Service, "2010 Filing Season Statistics" (Updated June 21, 2011), available at http://www.irs.gov/newsroom/article/0,,id=237561,00.html.
6  Note that some of these red flags have been updated from the previous advisory, based on information received from the IRS.
7  See, e.g., 31 CFR 1020.320.




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