What Happens When Someone Else Gets Your Tax Refund

By Dan Bobkoff

Published February 18, 2013 at 4:02 PM EST

Todd Macy, a banker from Marin County, Calif., was the victim of identity theft. Nearly a year after filing his return, he's still waiting for his federal tax refund.

If you usually wait until April to file your taxes, you might want to hurry up — before identity thieves beat you to it. Using stolen names and Social Security numbers, these criminals file fake tax returns with false wage and withholding information. This generates big — and fraudulent — refunds, before the real taxpayer gets around to filing.

The Internal Revenue Service says it's busy working to combat what prosecutors call a fraud epidemic.

Most taxpayers don't have any idea something is wrong until they hit the send button on their taxes and get an error message.

"I was told somebody had already filed a return using my name and my Social Security number," says Todd Macy, a banker from Marin County, Calif. It happened to him last year.

"I was shocked, and I felt like I was a victim," Macy says.

A few hundred miles south in Bakersfield, a teacher wondered what happened to her refund.

"I just figured something was wrong with their system," says Joyce Hood.

Someone had filed a return in her husband's name, using his Social Security number. The identity thief likely falsified earnings and made off with thousands of dollars from the Treasury.

The problem has been growing fast.

"Our cases have increased by about 650 percent since 2008," says Nina Olson, the National Taxpayer Advocate, kind of the internal watchdog at the IRS. People go to her when they have a problem with their returns.

The IRS itself says the number of cases has doubled each year in recent years. And a lot of the fraud is coming out of South Florida.

"It catches on like fire. It spreads like a virus. Friends tell their friends," says Wifredo Ferrer, U.S. attorney for the Southern District of Florida.

He calls this crime an epidemic. Fraudsters come from all walks of life: hospital workers, former Marines, white collar professionals and former gang members who have switched from street violence to tax fraud.

"I'm seeing from a lot of the local police departments in South Florida that the violence in their communities is being substituted for stolen identity tax refund fraud," he says.

The victims are as diverse as the perpetrators: rich, poor, young, old, alive and dead.

Ferrer says a Social Security number attached to a name now sells on the street for as much as $1,000. Scammers think they can get far more than that from a fraudulent refund.

For the victims, it means aggravation and long waits for a refund that's rightfully theirs.

Joyce Hood, the teacher in Bakersfield, says she spent hours at the IRS office. Officials told her it could take up to a year to get her refund.

"And I just looked at them, and I said, I can't, I really need this money. I have a daughter starting college," says Hood.

As she waited, she paid part of her daughter's tuition with a credit card, racking up interest charges until the refund finally came last fall.

The IRS says it has stopped 5 million attempts to get fraudulent refunds, saving taxpayers $20 billion. And it says it's using more aggressive screening technology to try to weed out scammers.

"We've at least doubled the number of filters that we have. The filters work very well," says Steve Miller, the IRS acting commissioner. He declined to elaborate for security reasons.

The IRS also says it took action last month against nearly 400 people suspected of refund tax fraud. Miller says the agency is working on its online security, and better ways to identify the real filer.

"I think we'll get there," he says.

But critics say the IRS could do more. Last year, a Treasury official estimated refund fraud could cost the government $21 billion over the next five years.

The IRS also has some work to do to get its computer systems talking to each other. Banker Todd Macy says someone used his Social Security number in February 2012, but when he filed an extension in April, there was no warning. It wasn't until October that he discovered the fraud. Now, he's still waiting for his refund.

"And I probably won't see that refund for, I'm told, at least six months or a year," Macy says.

He's not alone. Even some IRS workers have been victims of refund fraud.