(NBC News) - Identity thieves are stealing billions of dollars a year through fraudulent tax refunds, and the IRS isn't the only target. The 43 states that collect an income tax are also being flooded with these bogus returns.
A report from the Treasury inspector general for tax administration estimated that fraudulent tax refunds resulting from identity theft totaled about $3.6 billion for the 2011 tax filing season. That's down by $1.6 billion from the previous year due to better detection, but the report says the ongoing problem creates "devastating consequences for taxpayers" that "erodes their confidence" in the federal tax system.
At the state level, the resources simply aren't there to tackle this problem. Some revenue collection offices have put procedures in place to spot the most obvious warning signs of fraud, such as too many returns to the same address or bank account, but a lot still slips through.
Georgia, Indiana and Louisiana now contract with LexisNexis Risk Solutions to screen all of their returns against its massive database of public information.
When LexisNexis finds a suspicious return, it's flagged and set aside. A letter is automatically sent to the taxpayer instructing them to go online and answer a few simple multiple choice questions to verify their identity. The questions cover information an identity thief wouldn't likely know. For example: Which of these addresses did you live at or which one of these cars did you own?
Georgia started using LexisNexis for the 2011 filing season. It paid the company $3 million to filter all of its returns, and the system caught $25 million worth of fraudulent refunds.
The system does create false positives, legitimate returns that are flagged as suspicious, and that can slow down a refund for a least a few days. But MacGinnitie, whose wife was a victim of tax ID fraud, believes it's a reasonable trade-off.