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The rising tide of tax filing fraud

It's a crime that's become so pervasive that people ranging from U.S. Attorney General Eric Holder to prison inmates have fallen victim: Fraudulent tax filing.

The issue hit home for many workers last week, when TurboTax temporarily halted filing state returns amid an uptick in fraudulent filings. While TurboTax, which is owned by Intuit (INTU), resumed filing on Friday night, the problem is on the rise, according to several states that have issued warnings about the crime.

Biggest IRS scam around: Identity tax refund fraud

In fraudulent tax filings, criminals submit tax returns for other people, using stolen information such as Social Security numbers and employer information. They then direct the IRS or state treasury departments to pay the refunds into their own accounts, collecting as much as $5.2 billion in fraudulent payments. The IRS said it investigated almost 1,500 cases in 2013, a surge of 66 percent from the previous year.

For consumers who are hit with a fraudulent return, that can be just the start of a major headache.

"A typical identity theft victim will find out by filing their tax return and learn the IRS can't process it because someone else has filed using their name and Social Security numbers," said Justin Gelfand, an attorney at Capes, Sokol, Goodman & Sarachan, P.C. in St. Louis, Missouri. "You may also get a suspicious piece of mail from the bank offering a refund anticipation loan, or from the IRS."

Tax fraud warnings: Scammers steal identities to take IRS refunds

For consumers who uncover a scam perpetrated in their name, the first step is to file an identity theft affidavit with the IRS. The IRS also asks that consumers continue to pay their taxes and file their tax returns, although it may be needed to done by paper.

Some states have issued warnings about the rise in fraud, including Vermont and Alabama. Vermont, for its part, is allowing residents to check if someone hasfiled a return under their Social Security number.

The major immediate headache for consumers hit by tax fraud is significant: A wait of six to 12 months to receive their much-anticipated refund, Gelfand notes. That can be painful for taxpayers who rely on their refund to carry them through the year.

"Many people live off their refund," which adds to the sting of the crime, Gelfand added

The other impact is that criminals may use a consumer's data to engage in other identity-theft crimes, from applying for credit cards in their names to taking out loans. Taxpayers who have been targeted by identity theft should also file a report with the local police; file a complaint with the FTC; and contact the three major credit bureaus to place a fraud alert on their file, according to the IRS.

Anthem breach is latest in ongoing string of cyber attacks

For criminals, filing fake tax returns is appealing because it's lucrative and easier than ever, thanks to data breaches such as the recent attack on Anthem, when fraudsters stole a treasure trove of data including Social Security numbers, personal income and patients' employer information. Stolen data often ends up for sale on the "dark web," where criminals can buy it and then use it to file fake returns or open fraudulent credit card accounts, for instance.

Many cases are never caught because the fraudsters are filing fake returns for dead taxpayers or those who are incarcerated or in nursing homes, Gelfand noted. In one case from October, a brother and sister from Georgia plead guilty for trying to swindle more than $2 million in fraudulent tax returns from people including those in jail and some who were dead.

"Individuals have stolen tens of millions from the IRS simply by filing tax returns with false IDs," Gelfand noted. The IRS "is losing $5 billion a year, and that to me reflects how easy it is."