Nice refund.

Photographer: Andrew Harrer/Bloomberg

Fewer Tax Refunds, Fewer Scams

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Fraudulent tax filings are soaring, and no one seems to know exactly why.

The focus is on TurboTax, where a lot of the filings seem to come from. But Intuit denies that there has been a breach in its systems. Instead, the attack seems to come from two sources: fraudsters who start new returns using legitimate information, and people who crack passwords and use them to divert the refunds from already-started returns.

The latter sort of fraud is easier to fight than the former, and companies like Intuit should be using security measures such as two-step authentication to make it a lot harder to pull off. But it's going to be pretty hard for TurboTax to figure out if a new account is fraudulent, or if a fraudster has access to substantial financial information about a target. And unfortunately, thanks to numerous security breaches last year, fraudsters do have access to substantial financial information about a lot of folks.

Which is not to say that there's nothing that could be done. Unfortunately, the things we could do would have the effect of delaying refunds. If all returns were submitted at the same time, and refunds were held until they could be cross-checked against the IRS's copies of W-2s and 1099s, then this sort of fraud wouldn't work very well; the IRS would know it had two returns and could start the process of figuring out which one was fraudulent before it mailed the check. But we love our early refunds, and people often count on getting that check as early as possible. Delaying refunds until late spring or summer would put a lot of hurt on a lot of households -- though it would save the taxpayers money and the victims of fraud a lot of hassle.

However, there's one thing you personally can do to fight tax fraud, and that's make sure that you don't give the government more money than you have to. You should never get excited about a tax refund; all it means is that you gave the government a substantial interest-free loan by withholding too much tax throughout the year. You should aim for your refund to be as small as possible -- ideally, zero. That's true regardless of fraud, but fraud adds a new angle: That money you loaned the government is now an enticing target for hackers and con men who will do their best to steal it. When you're not due a refund, having someone steal your identity is still a hassle -- but it's just a hassle, rather than the kind of catastrophe that can ensue when you suddenly find out that money you were counting on has been diverted and that it will take you months to clear up the mess.

There's something that the government could do, too, and that's try to clean up the tax code mess that results in so many people getting big refunds at the end of the year. The government should have a running tally of what you've earned, and deductions should be minimal enough that it has a pretty good idea of what those will be, too. Tax simplification would also deliver a lot of other economic benefits, of course. But our politicians don't seem much interested in fixing our messy tax code, so I expect that we'll continue to see these sorts of problems for some time to come.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net