More scrutiny greets start of tax season

WASHINGTON - When the IRS begins accepting tax returns Tuesday, nearly all those involved - taxpayers, tax authorities and software providers - will be on alert.

The scars of the previous filing season, marked by a surge in tax fraud and a precipitous decline in IRS customer service, are evident as officials and taxpayers gear up for the new session.

Tax officials and tax preparation companies are touting new security measures to crack down on the criminals who use stolen data to file fraudulent tax returns.

'The IRS has been working closely with the tax industry and state revenue departments to provide taxpayers with stronger protections against identity theft,” IRS Commissioner John Koskinen said on a call with reporters about the start of the filing season. 'Because of these new protections, taxpayers may notice some minor but important changes when they file their returns.”

Some tax officials are asking filers to have patience while authorities gather enough details from them, from employers and from other sources to confirm identities before refunds are paid out.

Some states, like Illinois and Utah, have cautioned that refunds won't be issued until late February or March.

'The old days of fast refunds are gone,” said Verenda Smith, deputy director of the Federation of Tax Administrators, a group representing state tax authorities.

Last year, Iowa was among the states that reported a rash of fraudulent filings, recalling 816 direct deposit refunds. But only 10 of those were found to be fake and were investigated.

This year, some state tax agencies are using quizzes, letters and other measures to collect more information from consumers. They're also matching identities against driver's license databases and pressuring employers to report wage data earlier. Utah, for instance, passed a law last year that prohibits refunds from being paid out before March 1 unless both the employer and the taxpayer have filed the necessary forms.

For tax preparers, software providers are requiring account holders to use stricter passwords and login requirements meant to reduce the chance that a criminal can access their accounts.

TurboTax, the largest online tax filing service, will now alert users if a second account has been created with their Social Security number, giving taxpayers a heads up that someone else may be filing in their name.

Users of TurboTax and other software providers, including H & R Block, will have the option of requiring multi-factor authentication. After entering a password, users would need to enter a unique code sent to their smartphones or emails.

For the first time, the IRS, state tax officials and tax software providers will share information in real time about suspicious returns in an effort to spot patterns and catch fraud as it happens. Information shared will include technical details on where a return is filed and how it is prepared. Eventually, the sharing will take place through a centralized database meant to allow tax companies, states and the IRS to share details anonymously about apparent attacks.

The increased communication is meant to combat a trend that became more apparent last year: As data breaches increase criminals' access to personal information, the phony tax returns filed by fraudsters are more closely resembling the ones filed by legitimate taxpayers.

Despite these efforts, some taxpayers, who learned last year that their identities had been stolen, are rethinking the best way to file. Some may file sooner than before, knowing that sophisticated criminals may race to steal their refunds.

Some states are restricting how refunds can be paid, and some authorities hesitate to deposit refunds onto prepaid cards, the vehicle of choice for fraudsters.

Utah state tax commissioner John Valentine said the state is seeking a more reliable method for identifying prepaid cards so that those returns can receive additional scrutiny. Julie Magee, commissioner of revenue for Alabama, said that in some cases, the state may opt to issue paper checks that can be sent to a known address on file.

Last filing season, taxpayer services at the IRS reached a new low. More than 60 percent of calls to the IRS went unanswered, the Government Accountability Office reported. Those who did get through waited more than 30 minutes on average.

This season, the IRS has $290 million in additional funding for efforts to fight identity theft, bolster cyber security and improve customer service.

Koskinen said the IRS will hire more than 1,000 additional customer service representatives to answer the toll-free phone lines.

Taxpayers should note that the filing deadline is April 18 instead of April 15 because Emancipation Day, a holiday in Washington, D.C., falls on tax day.