State revenue chief takes aim at identity theft in tax system

Connecticut’s top tax official is optimistic that a new initiative designed to target identity theft will better protect Connecticut residents and businesses from security breaches and will recoup millions of dollars in income tax fraud for the state’s coffers.

But Department of Revenue Services Commissioner Kevin B. Sullivan was more skeptical about a controversial initiative enacted by the General Assembly last week. It assumes $1 million in fraud exists in a new state tax benefit for working poor families.

Thursday, Sullivan and Attorney General George C. Jepsen outlined the identity theft program that relies both on new safeguards implemented by state government, as well as increased vigilance on the part of all taxpayers.

Kevin Sullivan, left, commissioner of revenue services, and Attorney General George Jepsen outline the state’s new identity theft program.

“Cyber criminals become more sophisticated all the time,” Sullivan said, adding that each time taxpayers lose control over Social Security or tax identification numbers, or other personal information, “that raises the opportunity for crafty crooks to hack and steal.”

And though the department stopped more than $7 million in fraudulent tax refunds sought in 2012, criminals armed with misleading emails, fake Web sites, more sophisticated cyber attacks — or even access to household trash — increasingly try to claim state tax refunds using false identities.

This crime not only robs state government of needed funds, but creates complications that delay processing the filings of the victims of identity theft, Sullivan said.

“Hardly a week goes by that my office doesn’t hear about a data privacy breach where hackers or scam artists attempt to gain access to Social Security numbers, credit card numbers and bank accounts,” said Jepsen, whose office launched a task force to intensify investigations into identify theft.

Talented cyber criminals who can move quickly respond to published obituaries, hacking for confidential information and assuming the deceased’s identity to claim a refund before news of the death can reach government databases.

The South Carolina Department of Revenue reported in September that it  had been the  victim of a cyber attack that left nearly 3.8 million Social Security numbers, more than 380,000 credit and debit card numbers, and about 650,000 tax filings unprotected. Check routing numbers for thousands of households also may have been exposed in the incident, which Sullivan referred to as “a wake-up call for all of us.”

Sullivan’s agency approached the administration this fall with a proposal to crack down on identity theft and save as much as $10 million per year.

Faced with state budget deficit projections ranging from $365 million to $415 million, Gov. Dannel P. Malloy and the General Assembly decided in special session on Dec. 19 to launch the identity theft initiative as part of a much larger deficit-mitigation plan. The goal is to save $8.5 million before the fiscal year ends on June 30.

The Department of Revenue Services will seek approximately $500,000 in state financing next month to purchase new hardware needed to enhance income tax screenings particularly to target identity fraud.

But Sullivan and Jepsen said residents and businesses can take several steps also to stop identity thieves even from obtaining the personal information they than would use to bilk the state:

• File state income tax returns “as early as possible,” particularly if there has been a death in the family.
• Shred all paperwork with sensitive financial information before it is thrown in the trash.
• Enter financial passwords only into secure Web sites. These begin with the prefix “https:”
• Avoid placing sensitive mail in personal mailboxes. Residents should mail those documents at U.S. Postal Service offices, or from officially designated drop boxes.
• Never give out personal information over the phone unless you are very familiar with the company receiving it.

Sullivan also encouraged residents to carefully screen tax preparation services, avoiding those that seem “outside the range of professionalism” or have not established much history in the community.

The department receives complaints of services that charge exorbitant fees for preparing relatively simple tax schedules, or that arrange to have a client’s refund mailed back to the preparation business — rather than directly to the taxpayer.

“The problem with a lot of these fly-by-night tax preparers is that many of these people simply disappear,” Sullivan said, adding this makes it difficult for state officials to investigate and determine whether these business activities are merely unscrupulous — or also illegal.

The revenue services commissioner and his staff also were asked by the governor and legislature on Dec. 19 to try to save another $1 million before the fiscal year ends on June 30.

But this assumes a level of fraud in the new state Earned Income Tax Credit which was just launched this past January. Republican minorities in both the state House and Senate have been particularly active in pushing for new safeguards against tax fraud.

The new state credit is available to households eligible for the federal EITC, and is equal to 30 percent of the value of the federal credit.

Technically families earning up to $49,000 per year can qualify for a federal Earned Income Tax Credit, depending on the number of children they have. But most EITC recipients earn less than $18,000.

The average state credit is $601. And though the credit often is touted as a means to help the working poor save more, advocates say nearly all of the credits are spent — usually on heating and energy bills, groceries or other basic needs — making it an effective economic stimulus program.

Advocates also note the program was very predictable in its first year.

The legislature’s nonpartisan Office of Fiscal Analysis estimated that the state credit would cost state government $110 million in its first year.

According to final numbers from the Department of Revenue Services, just over 181,620 households claimed the credit, receiving just under $109.2 million in total.

Sullivan said Thursday that “I’m skeptical” that $1 million in fraud exists in the program, adding that “we have not seen any evidence” here, though complaints of errors in the federal credit system have been raised.

Sullivan noted that “we established a very high screen (system) before those (state) EITC refunds were sent out” last spring.

But the commissioner added that his agency would nonetheless work to achieve the target savings set in negotiations between the legislature and governor’s office.

James Horan, executive director of the Connecticut Association for Human Services, said advocates are wary of the new initiative, adding it would be incorrect to imply significant fraud exists in the new system.

“I think it was very political that this was put in the final (deficit-mitigation) agreement,” he said. “We knew that DRS has already put the measures in place” to screen the credit.

Follow Keith M. Phaneuf on Twitter.