How scammers use AI tools to file perfect-looking tax returns in your name

When you think of “tax fraud,” you probably think of people who find ways not to file their taxes honestly. But with the advancement of artificial intelligence, there’s a new type of tax fraud out there. 

This one involves hackers using a form of identity hijacking to file a tax return in someone else’s name and get the refund sent to them.

The dark web is revealing that tax fraud is on the rise. Here’s what you need to look out for to avoid becoming a victim.

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Post-it note on a tax form (Kurt "CyberGuy" Knutsson)

What is AI-powered fraud and identity hijacking?

AI-powered fraud is when hackers utilize AI’s abilities to commit sophisticated acts of fraud. One type of AI-powered fraud is known as identity hijacking, which is when hackers not only steal someone’s identity but impersonate them in all sorts of ways. One example is through deepfakes, which can have scary consequences for more than just the person being impersonated.

WHAT IS ARTIFICIAL INTELLIGENCE (AI)?

Another is through AI tax fraud, which is when the hacker uses AI to take your sensitive information and use it to ultimately get your tax return sent to them.

But how exactly do they do this?

Laser scanner over a person’s face  (Kurt "CyberGuy" Knutsson)

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How fraudsters are using AI to commit tax fraud

This new type of tax fraud was reported by the CEO of LexisNexis Risk Solutions’ Government group, Haywood Talcove, a cybersecurity and data analysis company.

The acceleration of fraud through AI

Historically, tax fraud has involved the use of stolen Personally Identifiable Information (PII), which refers to data that can be used to identify you. It includes both sensitive and non-sensitive information.

Sensitive PII: Full name, Social Security number, driver’s license, mailing address, credit card details, passport information, financial records and medical history. Companies often use anonymization techniques to protect sensitive PII when sharing data.

Non-sensitive PII: Zip code, race, gender, date of birth and even information available on social media sites. While non-sensitive PII is less critical, it can still contribute to identifying you.

Thanks to AI, criminals can now more efficiently exploit stolen (PII) Personally Identifiable Information for fraudulent activities.

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The process: From PII theft to fake IDs

Hackers may acquire PII through various means, such as phishing scams or malware. This information is then used to create fraudulent IDs, complete with the victim’s details but the fraudster’s photograph.

Exploiting facial recognition for IRS access

With a fake ID in hand, fraudsters can bypass the IRS’s facial recognition security measures, allowing them to file tax returns in the victim’s name and redirect refunds to their accounts.

IRS documents (Luke Sharrett/Bloomberg via Getty Images)

The call for enhanced verification measures

Experts are urging government agencies to implement more robust verification processes, such as cross-referencing IDs with DMV records, to combat this sophisticated form of tax fraud.

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How to determine if someone filed a tax return in your name

When the IRS identifies issues with your tax return, it will send you a letter before issuing any refunds. This notification provides an opportunity for you to flag the initial return as fraudulent and proceed with filing normally.

The IRS employs systems to detect suspicious returns. However, if its algorithms fail to identify anomalies and process a fraudulent return, you won’t discover it until you attempt to file your own return and encounter rejection.

In most cases, the second option is more common. Taxpayers typically receive an e-file rejection notice, which indicates a problem. Unfortunately, these notifications lack specific details. Instead, they merely highlight an issue related to the Social Security number. If you haven’t accidentally transposed any digits, it’s likely that tax identity theft caused the rejection.

What happens after the scammer files a fake tax return in your name?

The primary consequence of a fake tax return is the theft of your tax refund. The scammer essentially impersonates you and diverts your rightful return into his bank account. But the trouble doesn’t stop there. When you try to file your legitimate return, the IRS system will likely reject it due to a duplicate filing. This throws you into a bureaucratic maze to resolve the issue and prove your identity.

Adding to the frustration, tax identity theft is a growing crime, and the IRS processes for resolving these situations are still evolving. This can mean extended delays and uncertainty while you straighten things out.

Scam written on tax documents  (Kurt "CyberGuy" Knutsson)

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6 ways to protect yourself from AI tax fraud

Again, since this is a relatively new scam, cybersecurity experts are still learning a lot about what it looks like and, therefore, how to mitigate it. However, now that you are aware it’s out there, here are six things you can do to keep yourself safe.

1. File your taxes as early as possible. If you beat them to it, they can’t commit the fraud.

2. Never share your personal information, especially your Social Security number or other PII information, on messaging apps or during a phone call with someone you don’t know. Many phishing attempts lead people to give this information away before they’ve even realized what has happened.

3. Use strong passwords and reset them often. Create strong passwords for your accounts and devices, and avoid using the same password for multiple online accounts. Consider using a password manager to securely store and generate complex passwords. It will help you to create unique and difficult-to-crack passwords that a hacker could never guess.

4. Use an identity theft protection service: Using an identity theft protection service can be a crucial step in safeguarding yourself against tax fraud. Identity theft companies can monitor personal information like your Social Security number, phone number and email address and alert you if it is being sold on the dark web or being used to open an account. They can also assist you in freezing your bank and credit card accounts to prevent further unauthorized use by criminals. See my tips and best picks on how to protect yourself from identity theft.

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5. Don’t click on links or files when you don’t know what they are, even if they are from a trusted friend. That friend could have been hacked, and now someone is after you. The best way to protect yourself from clicking malicious links that install malware that may get access to your private information is to have antivirus protection installed on all your devices. This can also alert you of any phishing emails or ransomware scams. Get my picks for the best 2024 antivirus protection winners for your Windows, Mac, Android & iOS devices.

6. Do your best to make sure your sensitive data is not easy to find online. While no service promises to remove all your data from the internet, having a removal service is great if you want to constantly monitor and automate the process of removing your information from hundreds of sites continuously over a longer period of time. Check out my top picks for removal services here. 

If you suspect you’ve been a victim of tax fraud, the official IRS website provides step-by-step guidance on how to handle the situation.

Kurt’s key takeaways

It’s no doubt scary to think about all the different ways hackers and scammers can take advantage of you. And because AI is making their work easier, it’s hard to keep up. What will they think of next? That’s why, here at CyberGuy, we do our best to keep you up to date on the latest hacking news, so you can stay one step ahead of the crooks.

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In light of the growing threat of AI-powered fraud, what additional security measures do you think the government should implement to safeguard your personal information? Let us know by writing us at Cyberguy.com/Contact

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