The advent of tax season traditionally heralds a spike in fraud attempts, but 2024 is set to witness an unprecedented surge in tax-related identity theft, primarily fueled by advancements in artificial intelligence (AI). Cybercriminals are now leveraging AI to create highly convincing forgeries, from lifelike images to compelling videos, impersonating taxpayers to claim their tax refunds illicitly.
This troubling trend is more than a mere inconvenience; victims of tax-related identity theft face a daunting average wait of 19 months for the IRS to rectify the issue and disburse their rightful refunds. The process by which these scammers operate involves collecting a victim's personal information—ranging from photographs to employment details—through various means, including public databases, phishing emails, or other illicit methods. Armed with this data, they proceed to file fraudulent tax returns in the victim's name well before the legitimate taxpayer submits their own, exploiting AI to accelerate and refine their deceptive practices.
In 2023 alone, the IRS was alerted to 294,138 identity theft cases, leading to the flagging of over one million tax returns for potential fraud. The appeal of tax identity fraud to cybercriminals is unmistakable; the sheer volume of tax refund transactions presents a lucrative target, compounded by the difficulty of detecting anomalous activity within the annual filing cycle.
Experts within the cybersecurity industry, such as Ari Jacoby, CEO of Deduce, highlight the unique challenges AI poses to the IRS and tax professionals. The adaptive nature of AI, which iteratively refines its techniques through trial and error, makes it a formidable tool in the arsenal of cybercriminals seeking to bypass security measures.
The backdrop of these developments is a legislative landscape that has yet to solidify a federal privacy framework, leaving vast quantities of personal data vulnerable to exploitation. While the IRS is making strides to modernize its technological infrastructure with the support of Inflation Reduction Act funding, significant challenges remain, particularly in the realm of large corporate taxpayer audits.
Notwithstanding these hurdles, the U.S. Treasury has effectively employed AI systems to detect $375 million in fraudulent transactions in 2023, underscoring the potential for technology to serve as both a weapon and a shield in the battle against financial crime.
To mitigate the risk of falling victim to these sophisticated scams, the IRS advises taxpayers to file their returns as early as possible, opt for direct deposit for refund disbursements, and secure their IRS account by registering online. It is also critical to scrutinize any communication purporting to be from the IRS, as the agency predominantly communicates through postal mail.
The IRS Commissioner, Danny Werfel, has issued warnings about the particular threat posed by email scams, emphasizing the danger they represent to both tax professionals and their clients. Conversely, the increased reliance on AI by the IRS may inadvertently ensnare innocent taxpayers in fraud investigations, necessitating careful and thorough responses to resolve such inquiries.
In this evolving landscape, the key takeaway for taxpayers is the importance of early filing and vigilant protection of personal information. As the IRS harnesses AI to enhance its fraud detection capabilities, taxpayers must navigate the fine line between safeguarding their refunds and ensuring compliance to avoid unwarranted scrutiny.